Is Bitcoin a hedge against economic uncertainty? 

Bitcoin is frequently being touted as the new gold. With rising prices and its recent lack of movement despite geo-political events, could this finally be proven true? 

Economic uncertainty is defined as a time when stocks, shares, and other assets wildly fluctuate in price. To safeguard their portfolio, people turn to safe-haven assets. These are investments that hold their value, or even increase, during these periods. The last few weeks have seen Bitcoin follow the price path that these assets usually take. So is it moving from a risky asset class to a safe one, or is it just oversight?

Understanding safe-haven assets and their importance

The term safe haven asset is a broad umbrella. Generally, it points to assets that hold or increase their value through times of economic uncertainty. They can take many forms: For example, stocks in defense are a safe haven, as they do well when the global political situation looks shaky, and less so during peacetime. Certain currencies can also be seen as safe-haven assets. The US dollar has long been the bastion of this, but the Swiss Franc is also viewed as stable.

Precious metals are also safe havens, and the king of these is gold. This is because, unlike currencies, its value is not determined by economic policies and markets. Recently, it has been gold that Bitcoin is often compared to. The Bitcoin price today stands at $106,968, but this has been preceded by a strong run and record highs of over $111,000. All of this has been at a time of huge economic upheaval, both in the US and abroad. Even in the last few days, its price has remained fairly static as stock markets have fallen.

Safe haven assets are important due to their nature, making them the backbone of modern finance. They serve many roles: Acting as price benchmarks, collateral, and as a hedge against inflation.

Bitcoin’s recent performance during market turmoil

At no time has this become more apparent than in the last few weeks. Despite global politics and conflict, Bitcoin has managed to retain its value. Not only, this, but its volatility has fallen below that of US stock indexes. As of Monday 25th of June, its volatility level had gone to 27%-28%. This was lower than the Nasdaq 500 at -35% and the S&P 500 at -30%.

This is not to say its price did not drop. At the weekend, it shaved off around 6% falling below the $100,000 mark. Yet compared to similar previous events, this was minimal. For example, in February 2022 its volatility went to around 60%-65%. This signaled that investors held faith in Bitcoin, and may see it moving from what was once considered a risky asset class to the opposite, a safe haven.

Many also believe that Bitcoin may be a hedge against inflation. This is when the price of goods and services rises, meaning the buying power of a currency weakens. However, this is in serious debate with many espousing its continued volatility.

Comparing Bitcoin to gold

There are too many safe-haven assets to compare Bitcoin with. Getting an example of its current situation, it is best to turn to gold, to which it is continually likened.

The main difference is that gold has time on its side. It has been a safe haven for hundreds of years, centuries even. While modern markets are still young in comparison, Bitcoin is even younger.

Bitcoin does have a limited supply, standing at 21 million. This makes it rare, but not so elusive that people can’t get their hands on it. Gold also has rarity, but like Bitcoin can also be bought and sold easily. However, over the last few years, it has been Bitcoin that has provided the best ROI investment, due to its skyrocketing price.

As a benchmark, if you had put $1 into Bitcoin 12 years ago, you would now have over $6 million. If you had done the same with gold, you would have $1.69. However, return on investment and safe assets are not the same thing.

One major similarity is that they are both decentralized. Neither is overseen by a central bank or financial institution. This means with Bitcoin, no one body can manipulate its value for their own economic needs. In many ways, the same is true of gold.

Further institutional adoption of Bitcoin is taking place, and it is believed that this will decrease its volatility. Thus, it may become even more stable in the near future, furthering this path as a safe haven asset. What remains to be seen is a real testing of Bitcoin as an asset. It is a new concept, that has benefited over the past year from great sentiment from governments and banks. This does not guarantee success, however, and any investors must remain cautious.