In 2019, the idea that Bitcoin was a “safe haven asset” was a popular sentiment. But it has not fulfilled that role in 2020. Earlier this month, Bitcoin lost roughly half of its value in a single week amidst the global economic turmoil surrounding the coronavirus pandemic. Traditional markets are also down heavily.
That said, Bitcoin was not supposed to be a safe haven against any generic form of economic turmoil. Instead, Bitcoin was designed as a hedge against a very specific kind of crisis: the potential collapse of the fiat currency system.
In times of crisis, whether it be war or unsustainable budget deficits, governments have turned to high levels of inflation in order to pay for emergency spending projects that would otherwise be unfeasible. This has the side effect of diluting the money supply and reducing the value of people’s savings. Simple supply and demand theory shows that price will decline if supply is increased while demand remains the same.
Now that a member of the U.S. Congress has proposed that the Treasury mint two $1 trillion coins be sold to the Federal Reserve, this concern has fresh relevance. Additionally, the Federal Reserve has launched “QE infinity” and made it clear they're able to create an unlimited amount of cash to respond to the Coronavirus crisis.
Bitcoin, of course, is immune to this problem. There is no central actor who can be targeted to create more cash and devalue existing coins, providing some protection against the risks mentioned above.
What is the Case for Bitcoin Again?
One of the main arguments for Bitcoin has always been that the levels of government spending are already out of control and will eventually lead to a devaluation of the U.S. dollar and other fiat currencies.
In his presentation on the macro case for Bitcoin at Bitcoin 2019, Tetras Capital’s Brendan Bernstein covered the rise of socialist ideology, negative interest rates, and deficit spending as some of the reasons the supply of U.S. dollars will eventually be expanded at a rate that massively devalues the world’s most prominent fiat currency.
“[Quantitative easing] is monetary crack, and we’re about to relapse,” explained Bernstein.
There's also this tweet storm by Messari co-founder Dan McCardle from June 2018 that explains why Bitcoin has reacted the way it has to the Coronavirus pandemic.
Billionaire investor Ray Dalio has also shared his belief that this nightmare scenario espoused by Bitcoin bulls is likely to come true, although he doesn’t think the crypto asset will turn out to be the safe haven of choice among most investors at that time.
This situation with the coronavirus is completely different. Right now, cash is king, and fiat currency is still used to pay for basic necessities such as housing and food. In terms of short-term price stability and paying for goods and services, there is no competition for the U.S. dollar.
Recent moves in the markets have come as a result of an expected collapse in economic activity, not the end of fiat currencies.
That said, this pandemic is likely to lead to a continuation of the trends outlined by Bernstein in his Bitcoin 2019 presentation; namely, governments spending even more money that they don’t have, which will eventually lead to a devaluation of the U.S. dollar and other fiat currencies. The only question that remains for now is how much of an impact the pandemic will have on existing budget deficits. Either way, Bitcoin’s monetary policy will remain unaffected.
In short, Bitcoin (and gold) are hedges against the world’s fiat currency system, not any economic crash. Despite the recent crash in the Bitcoin price, the crypto asset is still very much acting as a digital gold, remaining unaffected by potential political influence in terms of its issuance rate and individual control over one’s money. This is the key value proposition of the network and cryptocurrency.
It’s worth noting that the Bitcoin price also recovered some of its losses last week in the hours after a top global fund stated $26 trillion worth of stimulus spending could be needed to help get everyone through the current economic turmoil caused by the Coronavirus pandemic. However, correlation does not necessarily equate to causation.
Still, the recent economic crisis is not the true test of Bitcoin. If we do see governments printing large amounts of money in response to the Coronavirus and throughout the 2020s, as looks likely to be the case, then we will see a true test of Bitcoin’s ability to act as a safe haven asset.