Many Bitcoin (BTC) advocates argue that the digital asset is well suited as a ‘safe-haven’ from struggling economies. Its hard monetary policy and distributed network keep it free from the inflationary pressures that plague many currencies around the world.
A look at the worst-performing currencies over the last five years highlights that there are certainly people who would have benefited from access to a reliable store-of-value asset.
Bitcoin 5-year performance vs USD = +2110% https://t.co/iRZr6vjMJN
— Alistair Milne (@alistairmilne) September 7, 2019
In the above Tweet investor and entrepreneur, Alistair Milne points out Bitcoin’s performance versus the US dollar with reference to other poorly-performing currencies compiled by Charlie Bilello. The 2110% gain versus the dollar is certainly impressive, but Bitcoin’s qualities make it potentially far more disruptive than simply a vehicle for the kind of wild speculation that has driven much of its rise.
Being entirely independent of central banks, governments, or any other controlling party, many people think Bitcoin will serve as an excellent means by which to escape an economy under harsh capital controls or extreme currency devaluation.
Bitcoin Store-of-Value Theories
There does indeed exist the occasional anecdotal story of someone using Bitcoin to protect wealth from an economy spiraling out of control. Bitcoin evangelist Andreas Antonopoulos often recounts his own family’s experience with Bitcoin during a banking crisis. After a lot of persuasions, Antonopoulos managed to convince his mother to use part of her pension that was being held in cash to buy Bitcoin. Sometime later, the economic situation in his native Greece deteriorated. Banks introduced harsh withdrawal limits and began confiscating balances exceeding a set threshold. This would have been devastating to Antonopoulos’s mother, who held her pension in a lump sum at a bank.
Similarly, a popular theory explaining the recent price rally in 2019 is capital flight from China. Some analysts point to the ongoing trade war between the U.S. and China, and the latter’s economic policy in response to it, as encouragement for Chinese citizens to use Bitcoin to protect wealth.
Critics of the ‘safe-haven’ theory for Bitcoin point to its wild price volatility as undermining the argument. It’s true that large drops in short spaces of time serve to lessen the asset’s appeal as a store-of-value. However, at this early stage in Bitcoin’s story, it’s perfectly natural for such swings to occur. Any other asset with no centralized control over its supply with such a small market capitalization would behave in exactly the same way as money enters and leaves.
Be Your Own Bank
It seems premature for the people of Venezuela, Turkey, or Angola to flock to Bitcoin en masse. Money is an exercise of trust after all. Even though anyone can technically learn to audit all of the Bitcoin code for themselves, for most people this isn’t practical. They, therefore, need to believe the audits of others or to experience it working faultlessly for a long time.
The longer Bitcoin stays around and the more often people hear about it outperforming other currencies, it seems a foregone conclusion that its fixed supply and permissionless network will continue to attract those looking to protect wealth from a struggling economy. As the market swells into stabilization, it will theoretically become an even more attractive store-of-value, thus absorbing more capital and further stabilizing the price.
What do you think about Bitcoin as a safe-haven asset? Do you think this will become its dominant use? Let us know your thoughts in the comments below.