Why Bitcoin’s Reputation As A “Safe-Haven” Investment Is Seriously Flawed

Why Bitcoin’s Reputation As A “Safe-Haven” Investment Is Seriously Flawed
Andrew Rummer

about 3 years ago4 mins

Mentioned in story

Bitcoin is on a tear. The OG cryptocurrency’s price has more than trebled since March – and a near-60% rise in the last month alone has seen it breach $18,000 for the first time since 2017. But while bitcoin’s attraction as a vehicle for speculative trading is obvious, it remains unclear whether it actually fulfills any truly useful function – either as a store of investment value or as a means of buying and selling goods.

Bitcoin price chart
Bitcoin’s wild ride continues

What does this mean?

As someone who welcomes new technologies and recognizes all too well the frustrating inefficiencies of most modern banking and finance, bitcoin certainly holds some innate appeal. But I still struggle to think of it as a serious investment or a useful unit of exchange. 

First up, let’s look at bitcoin’s capitalist credentials. Unlike a bond, which provides a regular coupon payment, or a stock, which confers a small slice of company ownership and a corresponding share in any profits, owning bitcoin nets you no income at all. This makes it inherently impossible to value. 

Of course, the same could be said of precious metals like gold and silver – but at least they have millennia of history behind them. And that brings with it a better idea of what the future might hold. In 20 or 30 years’ time, an ounce of gold will still be a small lump of inert yet seductively shiny metal. Bitcoin’s story, by contrast, stretches back a mere decade – including several forks when its users got locked in irreconcilable disputes. This makes bitcoin’s next steps much harder to predict. It’s entirely possible that a superior competitor could crop up in the coming years, leaving those still HODLing bitcoin looking like Luddites. 

Bitcoin’s fans like to think of crypto as a safe-haven investment: one which attracts buyers in uncertain times. I hate to break it to you, but both history and the here and now show bitcoin behaving more like any other risky bet. In recent weeks, investors cheered by better-than-expected progress on coronavirus vaccine trials have been buying riskier assets like stocks and selling established havens such as US Treasury bonds, the dollar, and gold. 

If bitcoin were a true haven, investors would currently be doing the same. And if you don’t believe me, just ask the Kansas City Federal Reserve – which in April came to the damning conclusion that “bitcoin has never exhibited safe-haven behavior since its introduction.”

Table of Kansas City Fed crypto research findings

So much for bitcoin’s failings as an investment. What about its use as a digital currency?

Put briefly, bitcoin’s high volatility – its price frequently rises or falls by more than 5% a day – makes it a poor choice for purchasing goods and services. It doesn’t make sense to buy or sell something bitcoin-denominated when you could end up out of pocket tomorrow.

There’s also a Catch-22 with bitcoin adoption: it’s too small to handle any serious slice of global trade, yet would attract even keener scrutiny from financial regulators should it grow much bigger. Even with bitcoin at $18,000 apiece, the combined value of all tokens ever mined is less than $350 billion. That’s well under 1% of the $42 trillion of global annual trade in goods and services. 

At the same time, as JPMorgan Chase CEO Jamie Dimon and hedge fund billionaire Ray Dalio have repeatedly pointed out, governments could easily act to clamp down on cryptocurrencies the moment their popularity seriously rivals state-backed cash, digital or otherwise. 

If bitcoin “becomes successful enough to compete and be threatening enough to currencies that governments control, the governments will outlaw it and make it too dangerous to use,” Dalio wrote on Twitter last week.

Why should I care?

Like any currency, bitcoin’s value stems from its network of users. Sure, it’ll maintain some worth as long as at least a few people don’t stop believin’ – as long as they’re willing to buy it or expend the effort involved in mining and maintaining its digital infrastructure. 

I can see bitcoin’s appeal for criminals, political dissidents, or middle-class citizens of economically unstable countries. But for most people, most of the time, bitcoin just isn’t that useful. 

Ultimately, bitcoin is a speculative investment – so treat it accordingly if you’re dead-set on buying some. As a “safe haven” it falls between two stools: assuming the rule of law is maintained, it’s much more hassle than investing your wealth in established bets like government bonds. What’s more, if the world does undergo some truly apocalyptic event (beyond even coronavirus, that is), then bitcoin’s reliance on networks of functioning computers renders it useless. In my view, the revolution isn’t here yet.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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