Last year around this time of the year, something historic happened. Something none of us ever imagined in our wildest dreams. A tiny virus made its way from China across the world and reached India. Since we did not have a vaccine at that time, the government took a risky step and imposed a lockdown on the entire country.
With the infection rates spiking each day, investors started moving their funds into ‘Safe Havens’. It was an attempt to insulate their portfolios from an economic downturn.
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What is a Safe Haven?
Safe Haven’s are financial instruments that offer consistent returns regardless of the economic situation of the world. In other words, for an asset to qualify as a ‘Safe Haven’. The asset’s value has to move up or remain consistent while the value of other financial assets is tumbling down.
Stocks are one of the most popular assets. But, people invest in stocks only with anticipation of profits in the future. With the entire country in lockdown, investors knew that businesses would come to a halt. They sold off their holdings, thus bringing the value of stocks down. And when they are pessimistic about investing in stocks, they tend to look for alternative assets or ‘Safe Havens’.
Safe Havens enable retail investors and institutional investors to add diversification to their portfolio.
Speaking of alternative assets that are safe and can rise in value in times of turmoil, perhaps the most perfect example we can think of is gold.
Since the time of our great-great-grandparents, ‘Gold’ has been the go-to investment for Indians. You can sport this shiny yellow metal as a jewellery piece while it serves the investment purpose for crisis times.
Gold is always in demand. In the past 15 years alone, gold has returned a whooping 278% returns. Who wouldn’t want to own it right? A pretty safe bet at testing times.
During the global recession in 2008, when the market crashed, people flocked to gold, and thus its value reached new heights. Since then, its performance has been significantly better than the rest of the financial assets.
But unfortunately, it comes with a cost – making charges, wastage, storage and whatnot. Also, in the past 30 years, if we tally up its returns, gold has only appreciated by 280%, which is not much different from its 15- year returns.
Birth of Bitcoin
Before Bitcoin was introduced, there was never a truly decentralized currency in circulation, and so the entire world was relying on fiat currencies that the government was somehow controlling. When it launched in 2009, Bitcoin has proven to be a macro hedge against any economic crisis.
The digital coin is designed to be detached and independent from the standard financial markets and has imbibed characteristics that make us consider it as ‘digital gold. Although it was introduced as an alternative currency, it has morphed itself into a more efficient store of value, a hedge against market risks.
Since its inception, which was just a decade ago, Bitcoin’s value has scaled up to unimaginable heights and exceeded most investors’ expectations. It has managed to outperform every other asset class, including stocks, real estate and gold.
Is Bitcoin a Truly Safe Haven?
Looking back at the Bitcoin White paper, Satoshi Nakamoto designed Bitcoin so that its mining would be similar to gold mining and set up a process for its issuance. While we have made a case in how bitcoin is an improved form of gold in an earlier post, the argument boils down to one key fact – the limited supply of Bitcoins.
Bitcoin was the first asset to be digitally scarce. Meaning, only 21 million Bitcoins can ever be mined and it is beyond any person to change that system. To make Bitcoin more deflationary, Satoshi also introduced Bitcoin Halving, where the reward for mining reduces by half every four years. Once the last halving takes place, no more new bitcoins can be issued.
Read this article for more information about Halving.
On the contrary:
With gold, there is no hard limit on supply. After the popularity of the fact that gold is found on asteroids, it is more clear that there can be a whole lot of gold supply than what was known. Since the value of gold depends on its scarcity, its value may drop in the long term if supply increases.
Such an event can never happen in Bitcoins case. It is unlikely that we will randomly find that there are more than 21 million Bitcoins available. Hence, as the demand grows, it is only reasonable to expect Bitcoins to gain value in the long run.
But we have to consider the fact that Bitcoin has been around for only a decade. Although its value has risen significantly, there were not many events that tested its ‘safe-haven quality. The ongoing pandemic is the very first major financial crisis since its inception. So far, it has served as a great alternative for investors, considering that its value rose 600% in the past year alone.
So, as discussed earlier, it may be premature to conclude whether Bitcoin is truly a Safe Haven or not. Also, Bitcoin is still in the unregulated ring.
Governments are beginning to realize their potential and starting to regulate the market. More retail investors now know the utility of Bitcoin.
Judging by current trends in the market, we could state that Bitcoin gives Gold a strong run as a Safe Haven Investment.
With a strong network of miners, increased mainstream adoption and a limited number of Bitcoins in existence, it has cemented its foundation for becoming a universally trusted asset.
We are yet to see whether Bitcoin achieves the ubiquitous acceptance that Gold currently enjoys, but the future looks bright.
KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.