How Reliable Bitcoin Is as a Safe-Haven Asset?

Before we discuss how Bitcoin can be considered a safe-haven asset or not, let’s look at the definition of a safe-haven asset itself. For an asset to be perceived as a “safe-haven”, it must be able to retain value even in time of economic problems or recession.

Gold, for example, is able to maintain its status as a safe-haven asset because it was able to prove its valuation to the world in the previous global crises. Gold was “negatively correlated” with the global economy, and it is usually expected to pump post-market crash events.

To become a new safe-haven asset, one needs to be able to become a perfect store of value and also able to maintain or grow its valuation during economic hard times. It needs to have solid fundamentals to maintain its consistent demand in the eyes of investors and long-term holders.

For example, fiat currencies like the dollar and euro might be a decent store of value in the short term, but their purchasing power gradually goes weaker over time. They technically have unlimited supplies and irresponsible money printing policies. The cost of one burger or one chicken goes up in the long run because governments always print more fiat currencies and cause inflations.

On top of that, economic hard times might cause the valuation of fiat currencies to drop significantly. In this case, central authorities (i.e. the Federal Reserve) always attempt to counter this issue by raising interest rates.

Once the crisis is controlled, the interest rates would then be lowered again to allow businesses to grow. During this time, fiat values usually go weaker compared to the previous cycle.

Using gold as our counter example, gold has a finite supply. Not every day people discover new gold mines.

So, assuming the demand stays relatively the same, gold price should appreciate in the long term due to limited supply. Post-2008’s global crisis, gold price appreciated up to 2011. This has proven gold to be a perfect safe-haven asset.

How about Bitcoin? Can it be seen as the next safe-haven asset after gold? Here’s the thing. In the earliest years of Bitcoin, it was actually perceived as digital money. Something that you can use to easily transfer value with a very low fee.

This narrative was changed around 2016-2017 when BTC enthusiasts started to see Bitcoin as digital gold and not as another digital money. The idea is that you might be able to find tons of other digital currencies out there but Bitcoin is the only digital currency that can be seen as a gold replacement due to its scarcity and strong decentralization factor.

The most excellent argument about Bitcoin is the fact that there will never be more than 21 million bitcoins. It was hard coded from the very beginning, and this max supply rule is almost impossible to be changed due to how decentralized the current Bitcoin blockchain is.

As you might already know, Bitcoin is created via the Proof of Work consensus mechanism. The mining process needs to be verified and confirmed by other miners all over the world, which makes it much harder to manipulate (as compared to fiat currencies, where the central entity can just edit the numbers).

And Bitcoin also has a unique mechanism called “halving”. This “halving” event basically halves Bitcoin new supply every approximately four years. In the very beginning, the Bitcoin blockchain gave 50 BTC every block as a reward to miners. The first halving in 2012 cut this reward to merely 25 BTC.

The second halving in 2016 cut the reward to 12.5 BTC. The third halving in 2020 cut the reward once again to 6.25 BTC. This process will continue forever until we get a total of 21 million bitcoins in circulation.

This supply mechanism is what crypto enthusiasts see as the perfect argument for Bitcoin. They believe Bitcoin is even better than gold itself because sometimes you see new gold mines being discovered in the news while Bitcoin’s supply is just hard-coded math with a decentralized network.

Bitcoin can become the perfect safe-haven asset if one day its demand can be consistently high, just like gold. It already has a perfect supply mechanism to support its valuation status. The only issue is the demand and how far the world will adopt Bitcoin as a store of value.

And for those who think, “why can’t I just make a new cryptocurrency and compete with Bitcoin as the next digital gold?” Yes, you can do that. Many crypto entrepreneurs have tried to do that. But it doesn’t matter how many cryptocurrencies exist out there; Bitcoin has proven itself to be the ultimate crypto OG.

Ethereum came close to surpassing Bitcoin’s market cap years ago, but eventually, it fell short and has only stayed in second place ever since. The brand “bitcoin” is already too large to ignore, and new cryptocurrencies are forever walking behind bitcoin’s shadow (at least until now).

In fact, whenever another crypto gains new use cases or adoptions, this only contributes to the popularity of Bitcoin. The name bitcoin is already synonymous with cryptocurrency itself. 

Now here comes the arguments from the skeptics. It’s only fair that we discuss this issue since we need to hear arguments from both sides, isn’t it? So the usual argument that the skeptics have about Bitcoin is the fact that Bitcoin price is too volatile, and thus it cannot become a safe-haven asset.

Unlike gold, where the fluctuation has not been that much, Bitcoin price fluctuates easily and has caused a lot of problems for crypto traders and investors. For comparison, Bitcoin used to be priced above $60,000 back in November 2021, and it was trading for less than $21,000 on June 29, 2022. As you can see, Bitcoin has lost over 70% of its value in just within eight months.

The thing is, Bitcoin price has been highly volatile since the very beginning. There were a few “calmer” years where Bitcoin went sideways, but eventually, it always returned to high volatility moments like this year or the previous year.

 On top of that, Bitcoin price action has been highly correlated to the tech stock prices. When the stock market crashed this year, Bitcoin price also tumbled. Nobody says the stock market is a “safe haven,” and as long as the correlation continues, it’s very likely Bitcoin will never become a true safe-haven asset. Everybody knows the stock market is highly speculative, and most people don’t put their life savings into the stock market in uncertain times.

Having no intrinsic value is another argument that the skeptics have about Bitcoin. They believe gold has a long history in previous civilizations. Many ancient civilizations used gold as a symbol of wealth and status, making it much easier to be accepted by societies. Meanwhile, bitcoin has no use outside the digital space.

Both the optimists and skeptics have good points when it comes to this debate. However, it’s important to note that even fiat currencies and gold are accepted as they are today simply because of “shared belief.”

A fiat currency has value because the citizens in the country accept it when the government issues that fiat. Gold has value because everybody believes it is a safe-haven asset.

What does it mean for Bitcoin? If one day there is enough “shared belief” among the global community to accept Bitcoin as the next safe-haven asset, we might witness the true evolution of Bitcoin, and the price fluctuation might not be much of a problem anymore. When that time comes, we might see Bitcoin as the true safe-haven asset, just like gold, or even better.