This question has popped frequently in the crypto world. Crypto advocates have always considered Bitcoin the money for the crisis. Now the crisis is here and bitcoin reliability as crisis money is being tested. Still, crypto advocates believe that now, bitcoin’s role becomes more important than ever.
When governments started with the current pandemic measures, financial markets started crashing heavily amid fears of a global economic crisis. The Dow Jones lost more points in March 2020 than ever before. To the surprise of many, Bitcoin also crashed at the same time with the traditional asset classes. The price of bitcoin halved jut 2 months before the halving on March 12, when the bitcoin price dropped by 50% going from around $ 8,000 to under $ 4,000, marking this day as the biggest daily loss since April 2013.
Bitcoin price crash in March 2020 – source: Coinmarketcap
With bitcoin reacting like this, similar to other financial assets, does it mean that bitcoin being a safe haven is just a dream? Shouldn’t Bitcoin react in the opposite way the old financial system reacts? But it is not that simple like that. In the second week of March even gold “the safe haven” fell from $1670 to $1470. What does this mean is that when people panic they act irrationally selling whatever they can, for cash even investments with long term potential like gold and bitcoin.
Bitcoin is scarcer than gold
However, gold quickly recovered from its losses and almost returned to the level it had before the crash. In the meantime, gold is sold out at many gold traders in view of the emerging economic crisis, so that a further price increase can be expected. Bitcoin has also risen steadily since its crash on March 12, hitting the $ 7,000 mark, but unlike gold, it’s still well below its pre-corona level of around $ 10,000.
Bitcoin is still a new and an unfamiliar asset for most investors. It cannot be expected to behave like gold, which has been used as a store of value for more than 5000 years. Bitcoin, at just 11 years old, is still in its infancy. It is still too new to be a safe haven for investors – but it has the potential to become one in the near future.
Satoshi Nakamoto designed Bitcoin so that it is even scarcer than gold. New gold mines are discovered again and again. In the 16th century, the discovery of the South American gold mines led to an oversupply and thus to a decrease in the gold price. Theoretically, even an asteroid made of pure gold could hit the earth and lead to a new flood of gold or maybe people in the future may be able to go in the space to mine gold – extremely unlikely, but not entirely impossible. However, such unpredictable events are impossible with Bitcoin. As is known, the maximum amount of Bitcoin is fixed at 21 million and can practically not be changed. Also, bitcoin is superior to gold because it can not be confiscated.
The stock-to-flow ratio
Bitcoin’s stock-to-flow ratio – source: PlanB
The value of precious metals such as gold, silver or platinum is closely related to their stock-to-flow ratio. This refers to the ratio of the total amount already funded (“Stock”) to the units funded annually (“Flow”). The higher the ratio of stock to flow of a scarce material, the more valuable it is. So far, gold has been considered the asset with the highest stock-to-flow ratio. The amount extracted to date is around 178,000 tons, and around 2,700 tons of new gold is added every year. Gold’s stock-to-flow ratio is around 66.
If we apply this model to Bitcoin, we see that Bitcoin will be even scarcer than gold in the near future. After the forthcoming halving in May 2020, 6.25 new bitcoins will be mined every ten minutes or 328,500 per year. The total amount of all mined bitcoins to date is around 18.5 million, so its stock-to-flow ratio is 56, almost reaching that of gold. After the next halving, which is expected to take place at the end of 2023, only 164,250 new bitcoins will be added each year. Bitcoin’s stock-to-flow ratio will then be around 116, significantly exceeding that of gold. This will continue until the last halving in 2140. Bitcoin’s stock-to-flow ratio will then be many times higher than that of gold.
So far, the stock-to-flow model has surprisingly explained the rise in Bitcoin prices. If we extrapolate the previous curve, it should increase significantly. According to this model, we could expect a price of $ 100,000 per Bitcoin in 2022, in the long term even one million dollars. It will take a while for investors to get used to the idea of Bitcoin as a safe haven. But it is very likely because Bitcoin is the scarcest and therefore hardest money in the world.
Bitcoin benefits in times of crisis
However, scarcity alone is not enough for a good to achieve high and growing value. Its benefits are just as important. And this is where Bitcoin can show its true strengths, especially in the times of crisis ahead.
As is well known, Bitcoin is not just a digital currency, but above all a global payment system that has been working reliably and with almost no downtime for more than 11 years. It is completely independent of the traditional banking system and is structured in such a way that it does not require middlemen and you do not have to trust anyone. If the financial system breaks down, which is inevitable, Bitcoin will continue to work. You will still be able to send money to any country in the world at low cost, even those that are unreachable through traditional channels, such as due to economic embargoes.
However, you can only use the payment system called Bitcoin if you have the built-in system currency with the same name. The more people discover the advantages of such a digital cash system, the more valuable this currency will be.
Bitcoin is inflation-proof
Bitcoin inflation rate
Governments and their central banks are creating new money by accumulating more and more debt. They are currently doing this at an unprecedented pace. Due to the corona crisis and its economic consequences, they give loans to companies whose sales have been cut off by government measures or continue to pay their salaries to people who have lost their jobs. This is understandable and probably the only way to avoid social uprisings and violent riots. But in the long run, the sharp increase in the money supply will water down the purchasing power of the money and the value of all savings.
It is very likely that many countries will experience hyperinflation, such as Germany in the 1920s or currently Venezuela. In such a scenario, Bitcoin will be extremely useful since its money supply cannot be inflated arbitrarily. Bitcoin is also inflationary but in a very slow and absolutely predictable way. No government, no central bank and no Bitcoin core developer has the power to create new Bitcoins out of nothing.
If government currencies lose their value, Bitcoins users will be protected from Fiat currencies hyperinflation and may feel just as privileged as US dollar owners in 1920s Germany or Venezuela today.
A Swiss bank in your pocket
Another big plus for Bitcoin: In times of crisis, governments are likely to introduce capital controls and caps for ATM withdrawals. When banks run into trouble, governments will try to “save” them by confiscating money in customers’ accounts – what they call “bail-in”. But those who keep their money in Bitcoin are protected from it. No government can stop Bitcoin payment, freeze your account, or confiscate your money. Barack Obama was quoted as saying that Bitcoin was “like a Swiss bank account in your pocket”. But that’s not entirely correct. If you own Bitcoin, you have a Swiss bank in your pocket, not just an account managed by someone else.
Governments will try to stop you from transferring money abroad, but you can still do so with Bitcoin. And if you want to leave a country with all your money, the government can’t stop you, even if it uses sniffer dogs and metal detectors at borders and airports. Twelve English words that you can save on a piece of paper or even in your head are all you need. All private keys that give you access to your bitcoins can be derived from this so-called seed phrase.
These properties make Bitcoin a really safe haven for your money. It is important to take control of money away from governments around the world because it is only doing harm. Whoever controls the money system controls our lives. Money should separate from the sate as the religion did in the past. We should, therefore, stop using government Fiat money and only use decentralized digital cash like Bitcoin for all payments.
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