Prominent gold investor, Peter Schiff, recently rebuffed claims that his favored asset faced competition from Bitcoin, arguing that Bitcoin’s price instability essentially meant it could never claim the mantle of being a ‘safe haven’ investment.
Not only has Schiff’s intervention reignited a long-running debate in crypto circles on the nature of money and how cryptocurrencies relate to this, but the possible answers to this question have big implications for investment strategy, both within and outside of cryptocurrencies.
Contra Schiff, I argue the extreme instability which seems likely to affect global economic growth for the foreseeable future means that any judgment necessary has to be hedged, but so long as political developments continue to threaten the rhythm of accumulation in all the main centers of the world economy, it is hard to question Bitcoin’s rapidly expanding credentials as a form of safe haven asset.
Back to Basics – Functions of Money
The basic economics of money have formed a core part of the undergraduate syllabus for almost as long as Economics textbooks have existed. Arguably the first truly systematic treatment was Alfred Marshall’s 1890 classic Principles of Economics, although here the nature of money was only briefly considered, and purely monetary variables were tacitly assumed to be essential neutral.
Fast forward to the 1930s, and Keynes brought money squarely into the center of economic analysis, although the mechanism by which it circulated in his model (the pump that drives the machine, as it were) was fiscal in nature.
Today, the simplified but still useful schematic whereby money has four essential functions (means of exchange; store of value; measure of value; method of deferred payment) is the most commonly used teaching device, and therefore it is against these four criteria that the various cryptocurrencies are usually held.
Leaving three of these functions to one side, one of the most interesting developments of the last few years has been the growing acceptance that cryptocurrencies in general, and Bitcoin in particular, have now passed the test of fulfilling the store of value function.
Price Turbulence Doesn’t Necessarily Equal Value Destruction
Whilst the ‘roller-coaster’, and very often ‘random path’, characterization of Bitcoin’s rises and falls may seem to discount this claim, empirical and theoretical evidence is starting to suggest the reverse may be true.
To justify this stance, firstly it is useful to link the general monetary concept of store of value to what could be described as its purest form: the so-called ‘safe haven’ class of assets.
Although individual investors will define and understand the term differentially with regard to their own portfolios, by ‘safe haven’ I mean any asset which investors increasingly turn to in times of market turmoil, on the premise that whilst traditional assets may be underperforming, safe haven assets can be expected to hold or even increase their value both during and potential after the turmoil has subsided.
First and foremost in this category has always been gold.
Bitcoin vs Gold
Whilst financial commentators often focus on Bitcoin’s erratic exchange rate, it has been less commented on that the gold price has also been increasingly irregular and hard to predict for some time now.
For example, earlier this summer global gold prices suffered their sharpest one day decline for over a year off the back of positive news emerging on US-China trade talks. Although this good news proved to be transient, it was enough to calm the worries of some investors, who began to reposition themselves away from safe haven assets like gold and back towards equities.
The aggregate effect of this repositioning generated an intraday drop of 1.8% on gold spot markets, and although this may not sound too dramatic to hardened crypto investors used to much larger swings, it should be noted that this drop came in the context of gold prices previously hitting a six-year high at $1,439.21 per ounce the week before, a rise which actually capped off an 8% rally for the previous month.
Whilst no one would argue this level of volatility disqualifies gold from claiming the mantle of the safest all of safe havens, it puts the legitimate criticism of Bitcoin’s price turbulence into context – price stability alone does not make a safe haven, and likewise price volatility (obviously within certain limits) alone is not enough to justify withholding safe haven status.
The Rise of Negative Yields
A second point in favor of starting to consider Bitcoin as a form of safe haven asset is the dramatic (and for traditional economic theory, very problematic) explosion of negative yields in various debt markets.
This seems to have reached something of a nadir with the German government’s recent auction of some 2 billion Euros in 30-year bonds with a negative yield. Leaving aside the fact that the auction didn’t clear and the Bundesbank had to buy the balance, the fact that this could be proposed, planned and executed at all suggests investor confidence globally is at or near record lows, and therefore that the demand for safe haven investments is soaring.
To return to the comparison of Bitcoin and gold, such a downturn in investor appetite for equities could be expected to bode well for both.
However, as can be seen from the chart below, the returns to holding gold in recent decades were by far the highest in the years prior to the 2008 crisis, although arguably the need for safe haven investments has only increased in the decade since.
This suggests that actually gold can fulfil a number of functions in an investment portfolio, safe haven being only one of them, and that T-bills and other government-backed securities are currently seen as being a safer place to ‘park’ large sums of money.
Broadly speaking, 2019 has seen Bitcoin on a significant recovery path, and the political and financial turbulence emanating from many sources, but primarily Trump’s trade war with China, on the one hand, and the UK’s simultaneously glacial yet unplanned and unforecastable exit from the EU on the other have undoubtedly feed into this.
The Verdict (for the Time Being)
As such, there appears to be growing evidence that some but not all international investors are starting to view Bitcoin as an asset to be included in their portfolio, especially given the risk of a global downturn pushing investors away from equities, and the increasing prevalence of negative yields making much government and corporate debt look unattractive.