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Evaluation of Bitcoin as an asset safe haven 

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Written by   11
1 year ago

Bitcoin is not yet a safe haven asset, but its monetary policy and long-term trajectory indicate that it is working there.

In times of economic chaos, what will investors turn to on a global scale? In a general sense, they enter assets that might be considered macro hedges. These macro hedges get their name from "safe harbors" to withstand the financial impact of global events such as economic recessions.

What is a safe haven?

Although there are different definitions, experts generally believe that the value of safe havens tends to rise, or at least maintain the same value, while other assets and their respective markets are falling. Since its launch, Bitcoin has been defined as a safe haven, and various analysts and publications have tried to do this based on market data alone. Although this applies to assets and commodities that have a truly global market life, for Bitcoin, a different approach is ideal.

Gold case

Usually, as mentioned above, a safe haven is the value that grows during turbulent times.

Perhaps the most famous example in practice is gold, especially from 1999-2020. Compared with the performance of other major global markets (ie stocks and bonds) during the same time period, key insights will be revealed.

During the global economic recession in 2008, the price of gold surged to a record high in March and has since continued to climb to new highs. Since then, it has been significantly higher than the performance of other financial markets. In general, this type of performance is often regarded as the simplest and most reliable indicator when determining whether an asset is a safe haven. As long as it undergoes growth, there is basically nothing else to do, then it fits the mold.

Providing further evidence of gold as a safe haven is the recent performance of gold during the COVID-19 crisis. For example, from December 2019 to June 2020, gold rose by 16%, even in the face of the US stock market crash in March and the rapid decline in bond interest rates.

To be honest, these are not even the only examples of gold's performance as a safe haven.

For example, in 2002, facing the bursting of the dot-com bubble, gold rose by 23.96%. Using this and the above examples, it is easy to conclude that gold is the most effective relief haven because it has been rising when there is basically nothing else.

However, no safe haven is perfect. In 2000, when the dot-com bubble began to burst, gold fell by 6.26%. Nevertheless, the definition of safe haven is less defined by the behavior at the beginning of the crisis, but by the behavior after it unfolds. In 2000-2002, the total growth rate of gold reached 19.11%, which helped to finalize this theory.

What are the disadvantages of safe haven gold?

Because when stocks and bonds do not rise, gold is also considered to be inversely proportional to these markets. If you are not familiar with the term, it means that when stocks and bonds rise, it may not, at least not so much. An effective example is the performance of gold at the peak of the dot-com bubble, when most countries in the world invested money in the stock market, and few other stocks. Since the 1995-2000 bubble occurred, except for 1995 and 1999, the price of gold has fallen every year. In addition, and perhaps more importantly, its average (average) growth is -5.12%, indicating a continuing downward trend.

Since global financial owners view gold as a major safe haven, these data can be used to conclude that assets (or commodities) need to fall as a safe haven during economic prosperity.

A better safe haven for Bitcoin?

Since its launch in 2009, Bitcoin has been set as a true macro hedge or safe haven because of how revolutionary it is. Before it existed, no other decentralized currency actually worked. Therefore, the entire world has always relied on legal operating systems or systems, which can always be manipulated by governments participating in these currencies.

Looking back at the Bitcoin white paper, it is easy to see where the name "digital gold" comes from. George Nakamoto likened Bitcoin mining to gold mining and set up this process as a necessary expenditure for Bitcoin issuance. However, it wasn't until Nathaniel Popper's "Digital Gold" was published in 2015 that Bitcoin's narrative as a new and improved form of gold became popular. Although we introduced the high point of this case in a previous article, as long as the argument that Bitcoin is the new gold comes down to a key fact.

This is the first asset ever to be very digitally scarce, because only 21 million bitcoins can be issued, and no one can change this. Adding to the point is that currently only 6.25 bitcoins are released per block (every 10 minutes), and this number is reduced every four years through an event called "halving". Once the last halving occurs, no new bitcoins will be issued.

In contrast, the supply of gold has no signs of hard restrictions. On the contrary, since the possibility of asteroid mining became widespread last year, it is clear that there may be more gold than anyone thought. Since the value of gold largely depends on its perceived scarcity, it is quite reasonable to expect its value to decline in the long term as the supply increases.

In the case of Bitcoin, such an event will never happen. There is no new Bitcoin that can just be discovered randomly and change its all-time supply, and most Bitcoin developers will have to agree to change the most fundamental aspect of its value. So far, there is no sign that such an event will come close to happening. Yes, forks have been made, but these networks are inspired by Bitcoin, and through all this, it has always stood up firmly in its original form.

The case of Bitcoin as a safe haven

Before trying to determine whether Bitcoin is a safe haven, it is important to present a case against it to obtain this status. First, recently, some analysts and news media have claimed that Bitcoin cannot be a safe haven because in March 2020, when the stock market fell at the height of the COVID-19 crisis, Bitcoin fell.

However, this is a short-sighted conclusion, because Bitcoin was only around 2009, and COVID-19 is actually the first major test of digital gold theory, so it is a better safe haven. In addition, before COVID-19 is basically over and the global market really rebounds, it is unreasonable to draw any conclusions about what is a safe haven during these periods.

In addition to comparing stocks with COVID-19 highs, the Bitcoin bear market also tends to use its historical volatility as an indicator, indicating that it cannot be a reliable safe haven because it does not really serve as a store of value.

However, measuring volatility in percentages alone is a deceptive path. First of all, volatility is just a measure of any change in asset prices over a period of time, whether it is upward or downward. Secondly, since Bitcoin's historical volatility has been declining since its launch and has reached historical lows this year, as shown in the chart below, volatility does not seem to be a strong point against it anymore.

Yes, there is no denying that 2020 volatility did rise sharply, but that was the aforementioned period in March last year. Yassine Elmandjra of Ark Investment explained that there was no confidence crisis during this period. , More of a "liquidity" crisis. This refers to a proven trend that when times become particularly difficult, investors will sell asset classes to return to asset classes that are considered "safer", such as cash. Although this may be like a crisis of confidence in itself, the situation becomes obvious when certain data is considered. But in fact, it's not.

The importance of restoring supply in turbulent times

In the context of Bitcoin, the restoration of supply refers to how many tokens return to circulation or start to move again when market volatility is particularly high. According to Elmandjra, in March, this indicator shows that the vast majority of new sports are coins that have been held for a year or less.

As the COVID-19 pandemic continues to spread, it is reasonable to continue to use this indicator together with other indicators and continue to look at Bitcoin's performance as a safe haven in a balanced way.

What other indicators can be used to test the case? Models such as volatility, price changes (measured by annual percentage growth), and stock-to-liquidity models help test Bitcoin's status as a safe haven, and thus also help test Bitcoin's status as a store of value.

Nonetheless, the best combination of indicators is the restoration of long-term supply, the growth of global Bitcoin users, and price growth. Using this trilogy, anyone can simply understand the path that Bitcoin is taking and whether the end point is a safe haven.

So, is Bitcoin a safe haven? If it continues its current path and continues to develop, then there is reason to expect it to become a safe-haven investment. In addition, MicroStrategy this year made Bitcoin as its "main reserve asset", that is, it uses Bitcoin as part of its capital allocation strategy to store value and provide a safe haven for the company and its investors. Given that their Bitcoin holdings are currently only purchased twice, namely 38,250 Bitcoin (as of September), this seems to show the first major example of a traditional company buying digital gold story. Putting this together with the news report earlier this year, that hedge fund manager Paul Tudor Jones (Paul Tudor Jones) seems to use Bitcoin as a split (allocation of 2%) and the global financial industry’s response to this In response, you can really start to see the progress Bitcoin is making. In short, there is nothing that summarizes Bitcoin's progress more than the recent crypto report released by the famous analyst Mike McGrone for Bloomberg.

"We believe that the main attributes supporting the price of gold and bitcoin-limited supply, store of value, diversification and quasi-currency-will continue to exist in an unprecedented world of quantitative easing. Benchmark encryption technology has won numerous imitators. Adopt competition and gradually become the digital version of gold.

Therefore, it is important to clarify that Bitcoin becoming "digital gold" does not mean that gold will die. On the contrary, in our commitment to a symbolic future, it means that we believe that one day, everything will live on the blockchain and be as easy to trade as Bitcoin.

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