Is bitcoin a “safe haven” in times of crisis?
This question is currently moving everyone in the crypto scene and beyond. Bitcoin has long been considered a money for crisis. Now the crisis is here: what role does the cryptocurrency play now? Author Aaron Koenig has been thinking about this and immediately found a number of reasons why Bitcoin is now more important than ever.
When governments began responding to the Corona virus pandemic with curfews on exit and contact, stock markets took a massive tumble as investors assumed these measures would lead to a global recession. The Dow Jones lost more points in March 2020 than ever before. To the surprise of many, Bitcoin also crashed at the same time as traditional asset classes. On March 12, the Bitcoin price fell from about $8,000 to less than $4,000 – the largest one-day loss since April 2013.
Is this the end of Bitcoin as a “safe haven” as some claim? Shouldn’t Bitcoin be independent of the old financial system? Shouldn’t it increase in value when everything else collapses? But it’s not that simple. Even the price of gold, the traditional “safe haven,” fell from around $1,670 to $1,470 in the second week of March. When people panic, they obviously don’t act rationally. They sell everything just to get their hands on cash, even assets with high long-term potential like gold and Bitcoin.
Bitcoin is scarcer than gold
Gold, however, has quickly recovered from its losses and is almost back to pre-crash levels. Meanwhile, with the economic crisis looming, gold is sold out at many gold dealers, so we can expect prices to continue to rise. Bitcoin has also risen steadily since its March 12 crash, topping the $7,000 mark, but unlike gold, it is still well below its pre-Corona level of around $10,000.
Bitcoin is still a new and unfamiliar thing for most investors. It cannot be expected to behave like gold, which has been used to store value for more than 5,000 years. Bitcoin, at just 11 years old, is still in its infancy. It is still too new to be a safe haven for investors – but it has the potential to become one in the near future.
After all, Satoshi Nakamoto designed Bitcoin to be even rarer than gold. New gold mines are being discovered all the time. In the 16th century, the discovery of South America’s gold mines led to an oversupply, causing the price of gold to fall. Theoretically, even a meteorite made of pure gold could hit the earth and lead to a new gold flood – extremely unlikely, but not completely out of the question. However, such unpredictable events are impossible with Bitcoin. As is well known, the maximum amount of Bitcoin is fixed at 21 million and can practically not be changed.
The stock-to-flow ratio
The value of precious metals such as gold, silver or platinum is closely linked to their stock-to-flow ratio. This refers to the ratio of the total amount already mined (“stock”) to the new units mined each year (“flow”). The higher the stock-to-flow ratio of a commodity, the more valuable it is. Until now, gold was considered the asset with the highest stock-to-flow ratio. The amount mined to date is about 178,000 tons, with about 2700 tons of new gold added each year. So the stock-to-flow ratio of gold is about 66.
If we apply this model to Bitcoin, we see that Bitcoin will be even scarcer than gold in the near future. After the upcoming May 2020 halving, 6.25 new Bitcoins will be mined every ten minutes, or 37.5 per hour, 900 per day, 328,500 per year. The total amount of all Bitcoins mined so far is about 18.5 million, so its stock-to-flow ratio is 56, almost reaching that of gold. After the next halving, which is expected to take place at the end of 2023, only 164,250 new Bitcoins will be added each year. Bitcoin’s stock-to-flow ratio will then be around 116, significantly exceeding that of gold. This will continue until the final halving in 2140. Bitcoin’s stock-to-flow ratio will then be many times higher than gold’s. Read more at genesisblockhk.com.
So far, the stack-to-flow model has explained the rise in the bitcoin price surprisingly well. If we extrapolate the curve so far, it should still increase significantly. According to this model, we could expect a price of 100,000 US dollars per Bitcoin in 2022, and even one million US dollars in the long term. It will take a while for investors to get used to the idea of Bitcoin as a safe haven. But it is very likely, because Bitcoin is the scarcest and therefore hardest money in the world.
Bitcoin’s utility in times of crisis
Scarcity alone, however, is not enough for a commodity to achieve high and growing value. Equally important is its utility. And this is where Bitcoin can show its true strengths, especially in the times of crisis ahead.
Bitcoin, as we know, is not only a digital currency, but above all a global payment system that has been functioning reliably and with almost no downtime for more than 11 years. It is completely independent of the traditional banking system and is structured in such a way that it does not require middlemen and no one has to be trusted. When the financial system collapses, which is probably inevitable, Bitcoin will continue to function. You will still be able to transfer money at low cost to any country in the world, even those inaccessible through traditional channels, such as because of economic embargoes.
Also you can do with your money whatever you want, take gambling for example. At a BTC casino you can gamble anonymous without the hassle of local restrictions. You can find the best BTC casinos at bitcoincasinos.reviews.
However, you can use the payment system called Bitcoin only if you own the built-in system currency with the same name. So, the more people discover the benefits of such a digital cash system for themselves, the more valuable this currency will be.
Governments and their central banks create new money by accumulating more and more debt. Currently, they are doing this at an unprecedented rate. Because of the Corona Crisis and its economic consequences, they are lending to companies whose sales have slumped away because of government actions, or they are paying salaries to people who have lost their jobs. This is understandable and probably the only way to avoid social uprisings and violent riots. But in the long run, the sharp increase in the money supply will dilute the purchasing power of money and the value of all savings.
It is very likely that many countries will experience hyperinflation, like Germany in the 1920s or currently Venezuela. In such a scenario, Bitcoin will be extremely useful because its money supply cannot be inflated at will. Bitcoin also inflates, but in a very slow and absolutely predictable way. No government, no central bank, and no Bitcoin core developer has the power to create new Bitcoins out of thin air.
When government currencies lose their value, Bitcoins users are likely to feel privileged in much the same way that owners of U.S. dollars felt privileged in 1920s Germany or in Venezuela today. I myself lived in Brazil when the country was going through hyperinflation of more than 1000% per year. At that time, I had a modest stipend from a German foundation that was paid in DM, so I was doing quite well compared to the Brazilian population. Consumer prices were raised about once a week, but my Deutschmark went up in exchange rate against the Brazilian currency every day.
A Swiss bank in my pocket
Another big plus for Bitcoin is that in times of crisis, governments are likely to impose capital controls and caps on ATM withdrawals. When banks get into trouble, governments will try to “bail them out” by seizing the money in customers’ accounts – they call this criminal act “bail-in.” But those who keep their money in Bitcoin are protected from this. No government can stop a Bitcoin payment, freeze your account, or seize your money. Barack Obama has been quoted as saying that Bitcoin is “like having a Swiss bank account in your pocket.” But that’s not entirely accurate. If you own Bitcoin, you have a Swiss bank in your pocket, not just an account held by someone else.
- Governments will try to stop you from transferring money abroad, but you can still do so with Bitcoin.
- And if you want to leave a country with all your money, the government can’t stop you, even if they use sniffer dogs and metal detectors at the borders and airports.
- Twelve English words that you can store on a piece of paper or even in your head are all you need.
- From this so-called seed phrase, you can derive all the private keys that give you access to your Bitcoins.
These features make Bitcoin a truly safe haven for your money. It is important to take control of money away from the governments of the world, because they have only done harm with it. Whoever controls the monetary system controls our lives. We should therefore stop using money issued by governments and only use decentralized (learn more at investopedia.com) digital cash like Bitcoin for all payments.