For a long time gold was regarded as the safe haven currency of choice by many investors around the world. The logic was simple: gold has certain intrinsic traits that make it excellent for preserving value.
At the most basic physical level, gold generally doesn’t tarnish and doesn’t degrade over time. Gold also has some valuable uses in electronics and other industries. Further, supply is limited and demand is high, largely because people quite simply love the shine of gold. Add it all up and gold is a near perfect safe haven asset.
Bitcoin, for many of the same reasons, stands a good chance of becoming a top choice for investors to park their money in when the global economy is hit by a bout of turbulence. This isn’t pure speculation either: when Greece was on the verge of collapse and the Eurozone was at risk, Bitcoin’s price spiked from less than $250 dollars to over $300 dollars within the course of a month.
Meanwhile, with China suffering from huge economic and financial strains, Chinese buyers have been cashing in their yuan for Bitcoin. Slowed growth, dropping consumption, potential real estate, stock market bubbles and other conditions have made many Chinese investors nervous, and last week it spurred a huge sell off, which plunged stock markets around the globe into the red. If you had invested in Bitcoin at the beginning of last week, however, you would have watched your investments climb even as everyone else’s dropped.
China’s economic problems, which seemed to emerge out of nowhere, may explain why Bitcoin’s price rose from $209 dollars last Monday, at the start of China’s stock market collapse, to $230 dollars at the close of the week. A large portion of Bitcoin purchases over the past week have been in Chinese yuan. Why? With the economy slumping, the risk of the Chinese currency devaluing have increased substantially.
Why Bitcoin could emerge as a safe haven
So what makes Bitcoin a good candidate to emerge as a safe haven currency or asset? Many of the same features that make gold so valuable, also make Bitcoin valuable. First, and perhaps most importantly, like gold there is a limited supply of BTC. While governments can continually print up cash and use quantitative easing to add trillions of dollars to the money supply, only 21 million Bitcoins can ever be mined. After that 21 million mark is hit, no more digital coins can ever be produced, though it’s believed that this hard limit won’t be reached until sometime around 2140.
Limited supply is especially valuable because it protects against inflation. While governments have a tendency to print money when they suffer tough economic times, Bitcoin will never face a similar scenario. If money supply does not increase, then generally speaking the risk of inflation is much lower. Gold’s limited supply, for example, has long been one of its most valuable traits and helps explain the metal’s position as a safe haven, and previous the commodity of choice for backing currencies. Bitcoin’s limited supply should make it similarly attractive.
Further, limited supply isn’t the only thing that makes Bitcoin valuable. Cryptocurrency consumes resources in order to be mined, which means you can’t just capriciously produce a bunch of random BTC. Money, on the other hand, can basically be created at will. If the US Federal Reserve System decides it wants to create $1 trillion in new money, it can do so.
On the other side, for Bitcoins to be made, miners have to produce them and that costs money because they have to purchase mining equipment and use a high amount of electricity. It’s a lot more expensive for miners to produce new Bitcoins than it is for the Federal Reserve to capriciously produce new money.
Interestingly, the process for mining gold is similar. Lots of investments, time, energy and mining equipment is needed.
So what does all of this mean?
The jury isn’t out, of course, but so far Bitcoin has proven its chops during the last few market crises. Since cryptocurrency is so easy to access, use and convert, it’s becoming an increasingly popular option around the world. Add in Bitcoin and related technologies’ increasing prominence on Wall Street, it’s reasonable to assume that the currency will grow more popular among traders, professional and amateur, in the future.
However, keep your eyes out for crises. If you have holdings in Bitcoin, you’ll likely see your coins appreciate when a major crisis roils the markets. Your gains might be 10 percent, 20 percent, or more. If the crisis looks like it’s going to be short and quickly blow over, selling your BTC in the aftermath of a market drop could be a smart move.
On the other hand, if conditions are going to worsen, you might be safer with your investments in Bitcoin. Financial crises are difficult to predict and there’s no surefire survival guide or money making strategy for when the economy does tank. Nevertheless, compared to a lot of traditional currencies, Bitcoin appears to be a pretty safe place to store your wealth.
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