Over the years, many have pointed to valuable commodities as potential “safe havens” in times of economic struggle. Traditionally, gold is the dominant commodity in conversations about this topic, and although there are legitimate doubts about the safe haven status of the precious resource, the general concept of an investment buffer outside of ordinary financial systems makes some sense.
Sticking with the example of gold, the basic idea is that its nature as a commodity that is not bound to any one government, industry, or currency protects it from economic recessions or market crashes. In other words, if the market crashes and the pound loses value, gold doesn’t necessarily need to follow suit.
Gold is traded all over the world, and may do just fine while a given country or region struggles. Additionally, because gold has this reputation, its value may even go up as major markets or currencies struggle. This is so because some investors habitually turn to gold, buying up the resource to protect their wealth rather than leaving it in a currency or stock portfolio that may plummet, says Alex Leslie, founder and CEO, Global Billing Association (GBA).
Again, it doesn’t always work out for the best, and most disciplined or knowledgeable investors would caution anyone against the idea of viewing anything as a perpetually safe idea. But the above description at least captures the theory of an unattached commodity as a safe haven. In the past few years, some have begun to wonder if Bitcoin or other cryptocurrencies might function similarly in times of economic downturn.
The fact is, Bitcoin does not belong to any government or currency, but instead operates independently due to its decentralised nature. The very idea of Bitcoin is for it to be verified by users rather than any bank or government with regulatory oversight.
Thus, it’s traded freely around the world and its value is impacted only by demand, rather than by the fluctuations of major economies and stock markets. In theory, it ought to work similarly to how those seeking safe havens hope gold performs.
But is this actually the case? We’ve actually mentioned before that Greek citizens made use of Bitcoin as a means of getting around capital controls on finances. Specifically, when the Greek economic struggles were at their worst limits were put on ATM withdrawals, prompting some to turn to Bitcoin, which was more accessible and more dependent than the euro at the time. This is merely one example, but it does indicate that some have shown a willingness to embrace Bitcoin in times of currency devaluation or even simply tightening financial regulations.
And more recently, we may have seen the biggest indication yet that Bitcoin could be viewed as a safe haven. Following the Brexit vote determining that the UK would be leaving the European Union world markets plummeted and the British pound lost eight percent of its value, essentially overnight.
At the same time Bitcoin investors enjoyed a nine percent jump in their accounts’ values. Bitcoin prices continued to surge for several days following the Brexit vote, as economies around the world faced the possibility of a prolonged negative reaction to the European turmoil. And though Bitcoin has since regressed marginally, it may have passed its first major test as “digital gold.” It looked strong while most every major economy in the world was weak.
This is not at all to suggest that Bitcoin should now be regarded as a reliable safe haven. The Brexit example makes the cryptocurrency look good, but even in that light not enough time has passed for us to be able to fully analyse the situation. However, if you’re someone who likes to have a backup plan for your finances, or you don’t like the direction of your currency or preferred markets, it’s at least worth keeping a studious eye on Bitcoin in the months to come.
The author of this blog is Alex Leslie, founder and CEO, Global Billing Association (GBA).
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