Despite the title of this piece, I still think Bitcoin is a perfectly valid instrument for trading. Furthermore, listening to people who called Bitcoin “a scam” while it was selling for $0.0001 all those years ago is my life’s “billion-dollar mistake.”

No, what I’m writing about is BTC’s recent price action. It’s clear to me that while Bitcoin may one day become a safe haven asset, it trades like a tech stock on steroids right now.

Now, before any crypto bro hits the roof, the one thing Bitcoin highly correlates with over the long term is global liquidity. And that’s something we’d expect to see.

Credit: Zero Hedge

But over the past 5 days, BTC has taken a big hit compared to a relatively flat yellow metal.

A report written by Sam Callahan and commissioned by Lyn Alden found that Bitcoin is highly correlated with global liquidity over longer periods.

Credit: Lyn Alden

But in the conclusion of their report, Callahan writes (bolds mine):

Bitcoin’s strong correlation with global liquidity makes it a valuable macroeconomic barometer for investors and traders. Its correlation is not only strong but also has the highest degree of directional consistency with global liquidity conditions relative to other asset classes. One can think of Bitcoin as a mirror reflecting the rate of global money creation and the relative strength of the dollar. Unlike traditional assets such as stocks, gold, or bonds, Bitcoin’s correlation with liquidity remains relatively pure.

However, Bitcoin’s correlation is not perfect. These findings showed how the strength of Bitcoin’s correlation declines over shorter time frames and also shed light on the importance of recognizing periods when Bitcoin’s correlation with liquidity is prone to breaking down.

The US and China recently opened up the monetary spigot, but BTC took a hit. Why is that? And if that’s the case, how can Bitcoin be “digital gold?”

Five Reasons Bitcoin Isn’t a Safe Haven

Bitcoin has been heralded by its proponents as "digital gold," a decentralized alternative to traditional currencies and a potential safe haven in times of economic instability. Its revolutionary blockchain technology, lack of central control, and scarcity-driven supply model make it an attractive investment for many. However, despite its impressive rise in popularity and price, Bitcoin has yet to prove itself as a safe haven asset like gold.

Here, we’ll explore several reasons why Bitcoin fails to meet the standards of a traditional safe haven, including its volatility, regulatory uncertainties, technological risks, lack of historical precedent, and market immaturity.

Bitcoin's Volatility

One of Bitcoin's most defining characteristics is its extreme volatility. While this volatility has been a key attraction for speculative investors, it’s unsuitable for a safe haven asset. Safe havens, by definition, are assets that maintain or increase in value during periods of market turbulence. Gold, for example, has been a reliable store of value over centuries, especially during economic downturns, inflation, or geopolitical instability.

On the other hand, Bitcoin has experienced wild price swings since its inception in 2009. Its value can rise or fall by double-digit percentages within days or even hours. For instance, during the COVID-19 market panic in March 2020, Bitcoin’s price dropped over 50% within a day, precisely when traditional safe havens like gold held steady or increased in value. Similarly, in 2021, Bitcoin reached an all-time high of nearly $69,000, only to lose almost half its value within a few months.

This level of unpredictability undermines Bitcoin's ability to function as a reliable store of value. Investors seeking a safe haven during turbulent economic periods generally prioritize assets that offer stability and predictability, characteristics Bitcoin doesn’t provide.

Regulatory Uncertainty

Another significant factor distinguishing Bitcoin from traditional safe haven assets like gold is the level of regulatory uncertainty surrounding it. Bitcoin operates in an environment where governments and financial institutions are still figuring out how to regulate it. While some countries have embraced cryptocurrencies, others have outright banned them or imposed severe restrictions. China, for instance, has enacted sweeping crackdowns on crypto trading and mining, contributing to massive sell-offs in the market.

Gold, in contrast, is universally recognized and regulated as a valuable asset. It's traded on established exchanges with clearly defined rules, and governments generally don’t restrict its ownership or transfer (with a few historical exceptions, like Executive Order 6102 in 1933). This regulatory clarity adds to gold's appeal as a safe haven. Gold markets are liquid, transparent, and supported by centuries of legal frameworks that protect investors.

The lack of regulatory certainty in the cryptocurrency space adds an additional layer of risk. Governments may impose more stringent controls on Bitcoin, restrict its use, or regulate exchanges where it’s traded, all of which can lead to sudden price drops. Safe haven assets must be universally accepted and operate in a stable, legal framework — something Bitcoin lacks.

Technological Risks

Bitcoin relies on a complex technological infrastructure that, while innovative, isn’t immune to failure or attack. The blockchain technology underlying Bitcoin is theoretically secure but still faces numerous risks. 

For example, vulnerabilities in the code have led to hacking incidents. Exchanges where Bitcoin is traded have historically been targets of hacking attempts, some of which have resulted in significant investor losses. The infamous Mt. Gox exchange hack in 2014, where nearly 850,000 Bitcoins were stolen, is a stark reminder of the security challenges facing cryptocurrencies.

Most seasoned crypto traders advise you never to leave your coins on an exchange. Instead, buy a cold storage hardware wallet and keep the coins safe at home or in a safe deposit box.

Additionally, Bitcoin’s reliance on technology makes it dependent on internet access and functioning infrastructure. In times of major crises — such as natural disasters, war, or widespread cyberattacks — the infrastructure supporting Bitcoin could be compromised, making it difficult or impossible for individuals to access or trade their assets. Unfortunately, this has been thrown into sharp relief in North Carolina the past few days.

Gold, on the other hand, is a physical commodity. Even in the worst-case scenarios, it retains value because it can be held, stored, and transported without technological intermediaries.

Technological risks add another layer of uncertainty to Bitcoin as a safe haven asset. While technological advancements may improve Bitcoin's security over time, its reliance on vulnerable systems creates a significant risk for those seeking a reliable store of value.

Lack of Historical Precedent

Gold’s status as a safe haven isn’t a recent phenomenon. It’s been used as a store of value and medium of exchange for thousands of years. Civilizations throughout history — from the Romans to the modern era — have relied on gold during times of uncertainty. Its value has remained relatively stable, even as governments and empires have risen and fallen. This long-standing precedent makes gold one of the most trusted assets for preserving wealth.

Bitcoin, on the other hand, has only been around for just over a decade. It has no comparable historical track record. While it has gained considerable value and attention in recent years, its role as a store of value during economic downturns has yet to be tested meaningfully. Until Bitcoin proves itself over time, particularly during periods of prolonged market instability, it won’t be able to compete with gold’s well-established safe haven status.

Investors typically turn to assets with proven stability when seeking protection from economic turmoil, and Bitcoin simply doesn’t have the historical foundation to offer that level of trust.

Market Immaturity

The Bitcoin market is still relatively immature compared to traditional safe haven assets. Gold is traded on well-established exchanges and has a vast network of buyers and sellers, ensuring its value is relatively stable, even under market stress. Bitcoin’s market, by contrast, is still developing. Liquidity can be an issue, especially during extreme volatility, when finding buyers or sellers at the desired price can be challenging.

Moreover, Bitcoin's relatively low market capitalization compared to gold makes it more susceptible to price manipulation. Large holders of Bitcoin, known as "whales," significantly move the market when they buy or sell large quantities. This makes Bitcoin prices more vulnerable to artificial inflation or deflation, something that is much less likely to happen in the much larger and more established gold market.

As Bitcoin's market grows and matures, some of these issues may be mitigated. However, the market is simply too young and too easily influenced to be considered a reliable safe haven.

Wrap Up

While Bitcoin has made significant strides as an alternative asset class, it hasn’t proven itself as a safe haven. The extreme volatility, regulatory uncertainties, technological risks, lack of historical precedent, and immaturity of the market all contribute to its inability to offer the stability and security that investors seek in times of economic crisis.

For now, gold remains the undisputed king of safe haven assets. Its long history, established market, and reliable performance during periods of uncertainty make it the go-to asset for those looking to preserve wealth. On the other hand, Bitcoin remains an exciting and speculative investment that may eventually mature into a haven, but only after overcoming its current challenges.