I think Bitcoin as a potential safe haven during an economic crisis. Bitcoin can potentially give a number of characteristics which counteract the volatility of a financial problems, including a lack of correlation to traditional markets and a trustless decentralised architecture. Through country a bye country discussion, we highlight advantages and disadvantages of the utilisation of Bitcoin in economically perilous times sparked by inflationary effects on currency, over leveraging on asset classes, political unrest, international trade relationships, and fiscal policy. The world Financial Crisis exposed the inherent shortcoming of banks and other financial institutions to the people that are involve. This same shortcoming lead to the creation of Bitcoin, a decentralised and open source currency that is not controlled by any one central authority.
More broadly, when using Bitcoin you no longer need to trust an intermediary to make a transaction or handle any of your currency for you. On the surface, this seems like a great solution for people who have lost confidence in their financial system, because it allows them to store value in a currency which does not require them to trust any of the central authorities which caused them the problem to begin with. However, a larger question arises — can Bitcoin actually be used as an effective safe haven from a financial crisis?
This is a trending debated topic in crypto and the financial world and was previously asked in a FundStrat Global survey to institutional investors. The result of the survey was that a resounding 72% of institutional investors believe that the price of crypto would rise during a recession. The main reasons behind that sentiment include:
The belief that Bitcoin is distanced and therefore not correlated to traditional markets.
Cryptocurrency is fundamentally tied to the concept of not having to trust a centralised authority. In theory, this anti-establishment movement should pickup momentum in a time of economic crisis.
The theory that governments and central bank funds will move into the crypto market during an economic crisis to diversify their currency reserves.
There are many advantages of using Bitcoin as a safe haven in an economic crisis, including:
It is not controlled by a central authority such as a government or bank. Most economic crises involve the fault of one of these central authorities, which is explored in more detail in the history section below. Bitcoin allows a safe haven for people who have lost trust in their government and banks because they no longer believe in their economic policies.
It is widely accessible, as you generally only need internet access to be able to purchase Bitcoin.
It can be used as a universal store of value that is quite easy to transfer ownership in.
It has no cross border limits, unless the local authorities makes rules and regulations preventing them, but even then it is incredibly hard to have any control over from a government perspective because of its decentralised nature.
It is distanced and historically uncorrelated from traditional markets, meaning it shouldn’t react to the same negative issues that people are generally trying to escape by using Bitcoin as a safe haven.
Crypto asset markets never sleep, allowing 24/7 access to investment.
However there are also many disadvantages of using Bitcoin as a safe haven, which makes many sceptical of its value in an economic crisis. These involves, the volatility has historically been very high. It is not a particularly good safe haven if the value is rising consistently and falling. This could create eveconsistentlyems for whoever is trying to use Bitcoin as a safe haven.
Bitcoin is largely still viewed as a speculative investment vehicle, which means you shouldn’t invest more than you are willing to lose. This does not align with the thought process of using it as safe haven for people who are trying to shelter themselves from economic uncertainty.
In the current landscape it is much easier to move from assets like equities and bonds into safe havens such as gold. This infrastructure is not yet in place for an easy transition to Bitcoin.
The liquidity of Bitcoin is lower than other safe haven option such as gold or USD based on bid ask spreads.
Transaction costs can be high cost fluctuates quite regularly) and transactions can also be slow also fluctuates based on network traffic.