A safe haven asset is something to buy during economic uncertainty. Historically, the safest asset you can buy has been gold. This is not because of anything inherently special about gold, but because that is what people believe to be the best long term method of storing value.
People believe gold is special because they assume that in future other people will believe it's special.
Criteria for a safe haven asset
A safe-haven asset must fulfil the following criteria:
- Price isn't controlled by any single party, including a state or bank. The market is spread out beyond the reach of any one organisation. This is important because an asset which is issued, controlled or backed by an organisation has its value tied to the health of that organisation.
- Supply isn't controlled by any single party, including a state, bank or anyone else - it exists naturally and the rate at which it's produced or traded is beyond the control of any one organisation.
- Supply is limited. The effort required to create the asset naturally limits the supply.
- The asset doesn't wear out or expire.
- It's prohibitively expensive to fake.
- Almost everyone considers it to be precious and valuable.
- It can be stored and transported simply. It's not delicate or volatile.
For these reasons, and because of historical consensus, people have been happy to use gold as a store of value in times of economic uncertainty or for long durations. Other assets also meets these requirements to lesser extents.
Bitcoin compared to gold
Consider why gold is so good as a safe haven asset and long term value store. For all the reasons above, bitcoin is better, except one: At present, not many people consider it to be precious and valuable, so the market is small. This will change as confidence and awareness increases, and the eco-system of services and applications matures.
The fundamentals are already established:
- A decentralised network ensures that Bitcoin can't be regulated or manipulated by any single government or organisation. The Bitcoin network can't be turned off.
- The present and future rate of supply is publicly available and unchangeable. This increases market efficiency and creates more rational pricing than a market where the rate of supply is unverifiable.
- Supply is naturally (mathematically) limited using proof of work algorithms.
- Bitcoin doesn't corrode or wear out.
- Bitcoin is impossible to fake.
- Bitcoin can be stored and transported more easily than gold. - If you can remember 24 words then you can access your bitcoin for free from any internet connection.
This article, published a week after I wrote this post, looks at different factors to consider when evaluating Bitcoin's value. It goes into a lot of detail, relative to what I've seen in other articles.