Bitcoin has behaved in the past few days as you’d expect a safe haven asset to behave, inversely correlating with stocks and for a period correlating with gold as well as oil.
This almost mechanical behavior can easily be explained by bitcoin’s gold like qualities that can be simplified to two defining features.
Bitcoin has a fixed quantity that can not be changed by any man or group that might want to print some out of nothing and pocket the mining blocks or use them to fund operations in a stealth taxation manner.
So making bitcoin’s supply an out there external just is, like gravity or indeed like gold which can’t be created from nothing.
This anti-devaluation quality gives it value to perform the second function which is just as important for safe haven status.
Bitcoin is outside of the banking system and can not be created out of nothing precisely because it is outside of the banking system.
While old men who pocket fiat mining blocks would argue bitcoin is flawed because it has no government backing, young men and pretty much everyone in difficult times sees that lack of government “backing” as the most important feature.
The easy example here is Lebanon where government “backing” has turned out to be government machination to the point the government there now has no money, is asking people to pay more for government services, and quite more importantly it has led to a situation where banks won’t give citizens their own money.
Reports coming from there suggest in bank branches it is a daily fight as considerable restrictions have been imposed on how much can be withdrawn because the government spent citizen’s dollars held in banks without quite informing their citizens of it.
So if you are in Lebanon, staying as far away from banks as possible would be a good idea, unless obviously you’re trying to get your money out.
Without good access to the banking system, the alternatives are very few. Cash is one, but you can’t move it digitally. Gold is another, but you can barely move it physically. Bitcoin is a bit of cash and a bit of gold, yet can be moved easily both digitally and physically.
Another perhaps more important quality is the fact that cryptos are far too easy to hide. You can just memorize the seed or you can even google cloud it by incorporating it in some essay or picture, so hiding in plain sight while having the ability to easily access it provided the internet still keeps running.
Because of these qualities, bitcoin is by definition a safe haven asset and thus behaves as one due to some very simple reasons.
It tends to be the case that in a time of crisis confidence in the banking system or in its government backing falls to the point of a bank run because people are not sure whether the bank would be able to continue operating.
In a case of war for example or likewise crisis there is little reason to think the bank will keep running, while bitcoin is global so there is little reason to doubt it will run.
Hence the predictable response of rising demand in places that face such crisis with speculators doing their best to try and front-run such demand in a chicken and egg cycle.
Yet while war or crisis is not too predictable, there is something that is very predictable due to the nature of money.
As you might know fiat does not quite have a block production but more a process of temporary creation and destruction with the latter depending on a compounding of the former.
A bank makes a loan in an outright creation of fiat money. The loan is repaid in an outright destruction of the aforesaid fiat money. Interest is demanded for this loan and this interest becomes what one can call actual money, with the cycle then so continuing in a compounding manner where more has to be loaned to cover the ability to pay the interest.
As long as distributed value creation grows in line with the amount of interest that has to be paid back, the system works in a chicken and egg cycle where loans create such value, and such value creates loans.
The emotional nature of man, however, with its shortcuts and much else, ensures either too many loans will be given or too few, with either of those spelling trouble.
A softening of it can be achieved by closer and closer to the ground loan makers, but the trajectory has been the opposite in bigger and bigger concentration of loan decisions to out of touch corporations that are now just four for all practical purposes.
In whichever scenario the undershooting or overshooting is inevitable, so at some point there are mass defaults because there’s just too much debt going around – meaning too much interest has to be paid back which they can’t – or because there’s too little debt going around. That would mean too little real value being created, and thus again they can’t pay back whatever loan they have taken.
In this mass default scenario you have a mass burning of money, yet to burn the money you need money. You can’t just clear it off as that would lead to hyperinflation. For every $1 cancelled or defaulted, a $1 has to be taken out of circulation in a deletion.
Thus in a mass default situation there are mass bank loses because the bank has to now cover all this, yet banks hardly put any of their profits aside for what is inevitable, so they go under or stand on the brink of doing so.
The government then steps in by the central bank creating money to give it to the commercial banks through loaning it to the government which has to pay interest because the central bank needs to burn the loan money with the interest becoming actual money.
Meaning we have a continuation of the cumulative effect and a repeat of the individual-bank with now government-centralbank.
As this mass default is the only enforcing feedback mechanism of “reality” saying too much has been printed, the mass defaulting event is probably inevitable due to the way the system has been designed.
During those events any bank money can be confiscated to cover the amount that has to be burned, with this abstraction translating to your property or value creation being seized as money is an attempt to reflect such real physical property.
It is easily seized if it is in banks, but can also be seized by law like in the gold confiscation of the 1930s.
In the case of the latter the matter would be far too political for bitcoin to reasonably be a differentiator as if the country is in such danger then the situation is very different, but in the case of the former, well you can avoid a haircut by just having bitcoin instead of money in the bank.
The far too simple point being that banks are fragile and in a time of crises are likely to go under or fiat money is likely to be inflated or hyper-inflated and thus the measurer of value has to be something outside of the system, like gold or like the more convenient bitcoin.
Meaning if there is a recession banks and government would be facing solvency questions making their services somewhat risky while bitcoin suddenly would look quite a bit more stable.
While in better times the smarter ones would prepare ahead, in addition to speculation as well as general growth because bitcoin is still far too new, so making it keep up in good times and perhaps even roar, while also being a refuge in bad times when it might be one of very few options.
Thus either boom or doom is good for bitcoin as it stands outside the banking system and thus is a very rare alternative to it.