Is Bitcoin Still a Safe Haven Asset?
The development of Bitcoin was motivated by the shortcomings of the traditional financial system but the narrative around Bitcoin has changed, people have nitpicked Satoshi’s emails and texts on online forums and reiterated it to what it is now.
However, two things stand out, and are topics of discussion, Bitcoin as an “uncorrelated asset”, and as a “safe haven asset”. This article aims to look at the second narrative and if Bitcoin is a safe have asset.
What is a safe haven asset?
Gold is predominantly the best and widely known safe-haven asset and the idea behind it is that the value of gold tends to remain unaffected by external factors (which include geopolitical unrest, changing financial infrastructure/regulations, etc). Even in terms of its physical properties, gold is inert [chemically inactive] and does not react with other substances.
The basic idea of safe-haven assets in investment is for it to retain its value during times of market uncertainty, turbulence, or black swan events.
However, the recent crash has caused a concurrent drop in every known asset class. So is gold still a safe haven asset? Is Bitcoin one too?
To answer the question, yes it is, especially with Bitcoin’s monikers — “digital gold” or “gold 2.0” it has more reason to be a safe haven asset. The reason why Bitcoin is called digital gold and hence a safe haven asset has more to do with the following three reasons,
- Bitcoin’s price and its resilience
- Bitcoin’s stock-to-flow ratio
- Bitcoin’s network
Bitcoin’s Stock-to-Flow and Price
Stock-to-flow [s2f] is an important metric that represents an asset’s scarcity or abundance. The ratio, if higher, represents the asset’s scarcity. Take gold, for example, its s2f ratio is above 60, and silver’s s2f ratio is 22, which means that silver is more abundantly available than gold, hence, it is also priced lower than gold.
However, Bitcoin’s current stock-to-flow ratio suggests it is higher than silver but below gold.
Furthermore, the 3rd Bitcoin halving, which is less than a week away will effectively cut the supply of Bitcoin in half. Not only will this have a huge impact on price, but it will also put the stock-to-flow ratio of Bitcoin higher than gold. Hence, making Bitcoin’s prospects of being a safe haven asset even more enticing.
Focusing on the price, the recent crash caused huge surge in correlation across different asset classes. Bitcoin’s correlation with the S&P skyrocketed to all-time highs. So did gold’s correlation.
As mentioned before, during times like these with massive liquidity crunches, the most liquid assets are sold off. Gold, being one of them has usually suffered a drop in price during recessions. The Black Thursday crash caused safe-haven assets like Gold to drop by a 14% drop and the US10Y by 53%.
The same happened with Bitcoin, it was the institutional investors speculating on the price of Bitcoin. The deleveraging of their portfolio caused Bitcoin’s price to plunge by 50%.
Hence, the correlation, which seems extremely important, is not, as this is temporary and the correlation will eventually reduce.
Since this drop, Bitcoin has increased by a whopping 140+%, however, other assets, including gold are struggling.
This shows how resilient Bitcoin’s price is. In its lifespan, Bitcoin has shown that it is a highly volatile asset with prices surging/dropping by 50% in a single day, yet the big picture for Bitcoin looks more bullish than ever.
Additionally, the price of bitcoin tends to increase rapidly after halving due to the supply shock. BTC surged by 6,600% in 12 months after its first halving and 270% after its second halving. Hence, the prospects of Bitcoin’s price post-halving looks bullish.
An important consideration here is that even during such a crash, the Bitcoin network remained fairly resilient The drop in network metrics seemed more like a small blip. Additionally, the hashrate continued to rise after the crash and so did the on-chain transaction value.
The equity markets, however, have seen a massive intervention by government bodies and central banks. Billions have been printed as stimulus packages and interest rates have been cut to ease the market and prevent its fall. Still, no signs of recovery have been noticed.
In addition, the Bitcoin crash was due to a sell-off by short-term holders and not long-term holders. More precisely, it was from holders that held bitcoin for 30 and 90 days. Since the long-term holders hold a huge chunk of Bitcoin, this metric shows that long-term holders are bullish and believe in Bitcoin.
To conclude, the halving will induce a negative supply shock for Bitcoin whose demand is ever-increasing. With billions of US dollars being printed, it can be said with utmost certainty that Bitcoin will come out of this black swan event, stronger than ever, perhaps, with its price heading to the six-digit zone in the next 2 years making it a safe haven and an asset class in a league of its own.