With the recent crash of Bitcoin and other Cryptocurrencies, along with the usual media rhetoric questioning the space, the big ask is How is Bitcoin of any Value? Is it really a Safe Haven? Where is it actually making any sort of impact today? The quick answer is, no, Bitcoin and other Cryptocurrencies should not be considered Safe Havens. And I've read in so many places where bloggers and commentators of the space keep comparing crypto to being a save haven. It's perhaps that the concept of Save Haven is misunderstood.
So what is a Safe Haven Currency?
'Safe haven' defines a currency which an investor will buy during uncertain periods because they are considered to be less risky, less prone to volatility, and, well, safe. That is why we typically benchmark Bitcoin and other Cryptos to the USD or Euro. Let's go further into what really defines a safe haven currency and compare it to Bitcoin and the Crypto space at large. What defines a Safe Haven currency? Here goes --
(1) Bitcoin does not have Political Stability
Stable currencies are based on stable politics because that leads to confidence that the country, and hence currency, will be around tomorrow. Countries in upheaval can face tremendous inflation that devalues the local currency by the day, if not by the minute. I'll give an example of inflationary issues below. For now let's think about political stability when it comes to Bitcoin, the poster child for crypto.
For two years or longer we have been facing growing concerns about how to scale Bitcoin. Two major camps formed differing solutions around what direction Bitcoin should move in, which is now leading to some form of a soft/hard fork. These decisions appear to change by the day and there is a lack of consensus on what is better for Bitcoin. And due, in some part, to this indecision, investors are wary of what to expect. We've seen huge bullish moves that have been slowing down when compared to the rest of the space. There is a heavy weight to Bitcoin that just wasn't there earlier because of this indecision. Uncertainty leads to further speculation which leads to further volatility. Until the leadership community is on the same page volatility will be there and Bitcoin will not be a safe haven.
(2) Bitcoin does not show Economic Growth
Justifying the power of a currency is based on historic proof that those using it are actually creating value using it. Otherwise we're just in Tulipmania, where someone is willing to pay more for the same object, even though that object is doing absolutely nothing but looking pretty (as I discussed in my last article).
Can we see Bitcoin proving that it has actually created real economic growth as of yet? For the moment the space is reminded of how it has been used for money laundering, illicit affairs on the Dark Web, holding computer hostage (i,e. Wannacry), and and method to move capital out of country. Those who believe in the space know it has far more potential than this, but we haven't seen enough examples of where Bitcoin is actually, fundamentally, making a difference. And that also harms it from being considered a Safe Haven.
(3) Bitcoin lacks Liquidity
How easy can one actually get access to the currency? What about if we want to sell it for something else? Is it easy to do so? Or are there barriers in the middle? Think about how challenging it is to even purchase Bitcoin for the general public. I've had luck only on Coinbase because I can purchase it using a bank transfer pretty easily, but haven't found the same luck on other exchanges. Then there are the fees to buy or sell the cryptocurrency, and the wiring fees to bring the USD back into my bank account when I want to cash out and use it for my daily living. On top of that there are multiple day delays between both sides of the transaction. I'm not talking about day to day exchange trading. I'm simply talking about sending money in and getting money out from my bank. With that kind of challenge liquidity is a big problem and certainly highlights a lack of liquidity.
Hence, Bitcoin is NOT a safe haven. In fact it is entirely the opposite, whether you are bullish or bearish about the space. Bitcoin is a game of belief in the future of crypto and that does mean speculation, which leads to tremendous volatility.
However! Bitcoin has shown true value for entire populations
Bitcoin Battles Hyperinflation
Though Bitcoin is not considered a Safe Haven in the traditional sense, does not mean that it cannot comparatively be a better option for some. In countries like Venezuela, Argentina, Sudan, and others where political instability has been causing a rise in inflationary pressure, devaluing the currency every single day, Bitcoin can actually be considered a savior. Let's use Venezuela as a case study
Venezuela has been facing incredible internal political turmoil. In 2013 the US Dollar was banned in Venezuela and that was the beginning of the rush towards Bitcoin. And recently, Venezuela faced 800% inflation in 2016 alone! Exchanging the Bolivar for any other form of currency has been increasingly difficult, resulting in black market exchanges for those desperate to find some way to salvage their savings. And this is where Bitcoin has actually come in to provide some relief. P2P marketplaces have started to thrive and Venezuelans have begun using Bitcoin as a way to not only safeguard themselves from the inflationary pressures of their currency, but also as a way to simply survive day-to-day life for basic necessities.
So, though Bitcoin is not a traditional Safe Haven, ironically, even its volatility has proven to be one for a handful of countries facing uncertainty. And perhaps that is something we do overlook when it comes to the power of cryptocurrency. It can redefine how we think of commerce at a large scale somewhere down the road. But today, it's already making an impact on thousands of people who, quite frankly, rely on it for their day-to-day lives.
SOURCES:
http://www.reuters.com/article/us-venezuela-economy-idUSKBN154244
https://www.cryptocoinsnews.com/opinion-venezuela-proves-bitcoin-future-money/
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Bitcoin Basics, no doubt!! Great post.