Over the weekend, Barron’s laid out the skeptical case in an article titled “Is Bitcoin A Safe Haven?”:
“This week certainly would appear to qualify as a good test for an asset’s safe-haven bona fides,” the magazine wrote. “There was a market meltdown in Argentina, escalating trade tensions between the U.S. and China, inversion of the Treasury yield curve (viewed as a recession indicator), grim economic news from Germany, and anti-government protests in Hong Kong.”
And yet, it noted, bitcoin ended the week down 10%.
I guess the whole “bitcoin = digital gold” thesis is dead, right?
Bitcoin Is Like Gold … Just In The 1970s
Safe haven assets are supposed to be boring. Take gold, for instance: The annualized return of gold since 1980 is 2.3%/year. Adjusted for inflation, it’s -0.7%/year. While there have been good years, like the 2000s, for the most part, it’s just sat there, like a dumb rock, holding its value.
Which is, after all, what it’s supposed to do.
If you’re interested in wealth creation, history suggests you don’t actually want a store of value; you want an emerging store of value. That is, an asset that has all the characteristics of a store of value, but doesn’t yet have widespread acceptance amongst investors.
We know this by studying the history of gold. The vast majority of returns gold has enjoyed in the modern era came in the 1970s. Consider the returns by decade:
- 1970s: 1,365%
- 1980s: -22%
- 1990s: -28%
- 2000s: 281%
- 2010s: 50%
The 1970s was, of course, when the U.S. abandoned the gold standard. At the time, people didn’t know what to make of gold. Would it succeed as a “safe haven” asset, untethered from the dollar, or be cast aside as a “barbarous relic,” as John Maynard Keynes once called it?
The result was a period of significant volatility, as the two forces argued back and forth. There were years, like 1975, when gold tumbled in value, falling 25%. And years, like 1979, when it soared, rising 120%.
There was daily volatility too: In 1973, gold’s price moved more than 3% one out of every ten days! Sounds almost like bitcoin to me.
It was exactly this risk, however–the possibility that gold could be cast into the dustbin of history, like cowry shells and other forgotten stores of value–that led to gold’s volatility and strong returns. As evidence mounted that gold would in fact continue to serve as a safe haven, returns spiked and more investors made gold a part of their portfolios.
That same process is taking place in bitcoin today.
(Note: In the mid-2000s, gold saw a large run largely catalyzed in part by the launch of the first gold bullion ETF, the SPDR Gold Shares (GLD), which opened up access for a new wave of investors; easy monetary policies also helped).
Bitcoin Is Both A Safe Haven Asset And Volatile. Let’s Get Used To It.
People love to make analogies and put unfamiliar things in a box. The bitcoin=gold narrative is an easy crutch because bitcoin shares many characteristics with gold. It’s scarce, portable, fungible, divisible, doesn’t degrade over time, and has value even though it has no cash flows. Moreover, in certain moments, bitcoin has shown signs of behaving like a classic store of value. When the U.S. labeled China a currency manipulator in early August, for instance, bitcoin prices spiked.
But at the same time, bitcoin is also a risk asset. It’s new, and much like gold in its first decade, its long-term position in the world is not yet secure. As a result, it shares characteristics with other risk assets, like stocks and venture capital investments. When markets enter a risk-off mode, some buy it as a safe haven while others lose faith and sell to peel back their risk.
These two forces—shelter from macro threats, and exposure to risk—can come into direct conflict. When the market stumbles for macro reasons, for instance, the day-to-day returns of bitcoin become hard to parse.
Over time, however, the dominant paradigm is clear: Bitcoin is an “emerging store of value.” Each day, more investors gain greater confidence in bitcoin’s place in the world. Each day, it gets easier for institutional investors and financial advisors to buy. Each day, millennials—who prefer bitcoin to gold by a 9-to-1 ratio—inch closer to their prime investing years.
Like gold in the 1970s, this has translated into volatile but strong returns. Given the level of skepticism that remains about bitcoin’s role in society, there’s still plenty of upside left.
Some day, maybe, bitcoin will also be boring as dirt. But chances are, if we get to that point, prices will be significantly higher than they are today.