The case for Bitcoin as a safe haven asset
Amid recent fluctuations in its correlation with stocks and growing correlation with gold, Bitcoin may be regaining its status as a safe haven for investors. From the weakening dollar to fears of inflation to geopolitical uncertainty, there are scenarios aplenty to support the long-term case for Bitcoin.
In times of economic or geopolitical turmoil, investors often turn to “safe haven” assets to protect their wealth. These tend to be durable assets that both have value and can be expected to hold their value over long periods of time (store of value).
Gold is generally considered the ultimate safe haven asset. Since its early days, many have seen Bitcoin as a potential equivalent in the digital world, so-called “digital gold”.
Is this plausible?
While its short-term price can be highly volatile, overall the value of Bitcoin has appreciated significantly over time. And there are signs that Bitcoin is already seen as a safe haven by many. With that in mind, below are seven longer-term scenarios for investors to consider that would support the Bitcoin as digital gold thesis:
Potential decoupling from traditional assets: Recent trends suggest an increasing separation of Bitcoin from traditional assets. Should this trend persist, Bitcoin's value could become insulated from the typical market triggers such as economic downturns, stock market crashes, or unexpected corporate earnings reports. This could provide investors with a protective shield during market downturns, positioning Bitcoin as a sanctuary in times of market volatility.
Increasing correlation with gold: Throughout its history, many have seen Bitcoin as a digital version of gold. At the moment its correlation with gold seems to be growing stronger. Should this trend continue, both individuals and institutions could increasingly view Bitcoin as a refuge during crises the same way they do gold, potentially leading to significant price appreciation. Bitcoin’s role as a replacement for gold could be bolstered by its digital nature. Bitcoin is much easier to transact with than gold (it offers near-instantaneous global transfers without the need for armoured cars). It is also easier to hold (requiring either a wallet or a crypto custodian, but no expensive, secure warehouses).
Waning trust in fiat currencies, especially the dollar: Bitcoin is independent of any government. If trust in traditional fiat currencies wanes, individuals and institutions alike could begin converting their cash reserves into Bitcoin to protect their wealth. This could happen globally, if people lose trust in the idea of fiat currencies generally. Or it could happen regionally. Bitcoin has long been favoured as a store of value in countries like Argentina, where trust in the national currency is fairly low. Something similar could happen on a much larger scale should trust in the US dollar erode. Some believe this is already happening.
Geopolitical uncertainty: As a safe haven asset, Bitcoin's value should in theory remain largely unaffected by national crises, political upheavals, wars, or even economic sanctions. That could make it a go-to asset for investors seeking stability in environments of escalating geopolitical tensions and uncertainty. Within nations suffering from political or economic instability, Bitcoin could become a lifeline, a way for citizens to preserve their wealth or even carry out transactions when the local financial system is compromised (see Argentina above).
Inflation hedge: While fiat currencies lose purchasing power over time due to inflation, with its algorithmically-capped supply Bitcoin is naturally deflationary. It can therefore serve as a bulwark against erosion of value over time. Bitcoin's finite supply could make it an attractive investment in today’s world of rising prices, the digital equivalent of a “hard asset”.
Bitcoin's limited supply: Thanks to the basic laws of supply and demand, the predictable and limited supply of Bitcoin should in theory drive its price as well. With total supply capped at 21 million coins, Bitcoin offers a level of scarcity hard to replicate in the digital world.
Increasing institutional adoption: Last but not least, widespread institutional adoption of Bitcoin could create a significant surge in demand, potentially resulting in increased price stability and liquidity for Bitcoin. This could further entrench Bitcoin's position as a digital safe haven asset, offering both stability and potential returns in an ever-evolving financial landscape. Here too – and despite last year’s market crash – the signs are rather in Bitcoin’s favour, at least for the moment.
Long-term Bitcoin holders are increasing year-after-year
A great method to demonstrate Bitcoin’s case as a store of value is by examining the percentage of its supply held over time. With on-chain metrics, we can track the last activity of purchasers, indicating when they bought Bitcoin (and left it in their wallet) until they sell or move it again.
Source: Glassnode (data), Sygnum Bank
The above graph reveals that despite last years’ price decline, long-term holders have shown remarkable confidence in holding onto their Bitcoin. Many investors who purchased Bitcoin shortly before or during the peak periods of volatility in the last bull market appear to be undeterred by the price fluctuations. This can be seen from the sharp rise in holders who have kept their Bitcoin for two years or longer. In fact, the percentage of all long-term holders hit record highs in recent months.
Supporting Bitcoin as a store of value
All the above scenarios — from Bitcoin's decoupling from traditional assets to its increasing correlation with gold, and the potential impact of geopolitical uncertainty — are of course just that: scenarios.
But to the extent they are plausible, they collectively point to an evolving role for Bitcoin in the global financial landscape. Unlike other safe haven assets like gold, Bitcoin is multi-dimensional, useful also as a means of payments, a unit of account and an alternative financial market infrastructure.
Given its inherent volatility and a still-evolving regulatory landscape, investors should evaluate these trends carefully. That said, we believe the case for Bitcoin as a safe haven asset over the longer term certainly has merit.
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