Bitcoin is the ultimate hedge against global economic uncertainty and financial meltdowns that are almost certain to occur in the future. The reason for this is the inherent characteristics of Bitcoin, which result in its value being completely decoupled from all other traditional financial assets. Achieving this fundamental decoupling is the key that cements Bitcoin’s status as the ultimate safe haven, or “schmuck insurance” as Silicon Valley venture capitalist Chamath Palihapitiya recently put it.
What are these characteristics that make Bitcoin so special? First, Bitcoin follows a deflationary model because its supply is fixed and can never be increased. There will only ever be 21 million Bitcoin that exist in the world. This is the opposite of every FIAT currency issued by a central bank, where supply is infinite and every day more money is printed, which leads to inflation.
Second, Bitcoin is completely decentralized, which means the network is spread across millions of nodes around the world, who are jointly responsible for maintaining the health and strength of the network. This means that Bitcoin is outside the control of any central bank, government, entity or organization. This frees it from the risks of fraud, manipulation or honest mistake that can cause untold suffering when applied to monetary policy, as we have seen time and time again, most recently in Venezuela.
Third, Bitcoin is trustless, which means it does not require a third party like a bank to verify transfers. This allows direct peer-to-peer transfer of wealth with both parties having the ability to independently verify the transaction. This is critical because it puts full financial control in the hands of the individual asset owner, without having to rely on any outside institution to maintain your funds.
Forth, every transaction on the Bitcoin network is stored on a public ledger that can be viewed by anyone at any time; the blockchain. And once something is written to the blockchain, it is immutable — it can never be altered or deleted. Needless to say, this level of transparency and certainty with regard to validity of data is unparalleled, and incredibly valuable in any financial system.
These characteristics make it clear that Bitcoin as an asset is ideally positioned to act as a hedge in the event there is another crisis in traditional financial markets, as we last saw in 2008. So it’s not a surprise to see Bitcoin rising in times of financial uncertainty. The current trade war between The United States and China, with the recent escalation of currency manipulation being added to the battle, is a perfect example of this. In a long and drawn out trade war, like this kind this could turn out to be, there can be no winners. Everyone is a loser, especially the economies of the parties involved. When those parties happen to be the two biggest economies in the world, everyone takes notice. If the U.S. and China both start to suffer, there aren’t a whole lot of countries that won’t feel some pain. So Bitcoin becomes a natural safe haven, since it would be utterly unaffected by any trade dispute between these or any other countries.
The mounting possibility of a no-deal Brexit would be disastrous on so many levels, and would have effects that would ripple around the world. It’s impossible to fully imagine all of the ways in which this could affect financial markets and systems, though it surely will, in overwhelmingly negative ways.
Again, the allure of Bitcoin, with its finite supply, its trustless, decentralized architecture, and its immutable ledger, is clear. It is an incredibly effective hedge against precisely the kind of political uncertainty we are seeing around the world that can wreak havoc on traditional financial markets. I believe it should be a key component of every serious investor’s portfolio.