Cryptocurrencies in Times of Сrisis. Will They Someday Become a Global Safe Haven?

There are several opinions about the role of Bitcoin regarding what functions of money it performs or can fulfill in the future. These well-known thesis look as follows:

• The store of value. The universal equivalent of value required for the exchange of goods and services.
• Means of circulation and means of payment. Intermediary functions in which liquidity plays a key role, that is, a high exchange rate of money for goods is necessary without loss of value.
• Means of accumulation. This niche is occupied by assets or money that can be reserved for the future to form wealth. Here, volatility plays an important role, the fluctuations of price. It is important for long-term capital planning.
• World money. Money used in international payments. Currently, the US dollar is the main one.

To put it simply, all functions can be reduced to two: exchange and accumulation of wealth. Here is how influencers regard Bitcoin's compliance with these roles.

G7 stablecoins working group, October 2019:

“The first wave of crypto assets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value. They have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments.”

Ray DALIO, American businessman, billionaire, founder of Bridgewater Associates, January 2020:

“There’s two purposes of money, a medium of exchange and a store hold of wealth, and bitcoin is not effective in either of those cases now.”

Dalio called high volatility the main problem of Bitcoin, noting also that limited scaling will not allow it to spread widely to the masses. However, looking at current events, let’s take oil prices as an example — they are as volatile as the price of Bitcoin nowadays.

There are several detailed reviews on the Internet why Bitcoin performs all the functions of money and the same amount of materials about why it doesn’t. Even regulators cannot conclude what Bitcoin exactly is — money, commodity or something else, and each of the local regulators has its own opinion and standards. However, neither prohibitions, nor approvals of different states cannot bring the world to the understanding of the essence of cryptocurrencies. It is better to turn to real examples of how people from different countries behave in crises of recent years.

During the reign of Hugo Chavez and Nicolas Maduro, Venezuela plunged into crisis. Several events remained particularly noteworthy, which confirm the thesis that the confidence in the currency cannot be discounted in the financial world, even if it is a legal means of payment, and it is accepted for tax payments. So, at the height of the crisis, local businessmen switched to bitcoins, and even to little-known tokens, preferring them to legal bolivar. Of course, demand for BTC and other alternative assets has grown. After the country's president launched the state-backed Petro, the shops still refused to accept it as a means of payment, as owners do not have confidence in the emission center, that is, in the head of state and the regulator.

Similar behavior occurs in the precious metals markets — during a crisis, investors dump cheaper stocks and buy gold. This confirms the hypothesis that in local situations, bitcoins are considered both as a means of payment and as a means of saving.

The table below shows the correlation between Bitcoin and the traditional benchmarks of the financial market for Q4 2019. The greatest correlation with Bitcoin was performed by gold and silver.

Source: Bloomchain

In addition to Venezuela, an economic downturn occurred in Turkey and Argentina. In Turkey, according to Statista polls, 20% of respondents own cryptocurrency or use it for payment. Before the sharp increase in demand for Bitcoin, the country faced an increase in fees, inflation, an increase in the discount rate and the collapse of the national currency, lira.

The currency crisis in Argentina led to inflation of 47.6% in 2018 and 53.8% a year later. The limit on the purchase of foreign currency was introduced (no more than $200), and thus the demand for cryptocurrencies has increased in the country, similarly to Turkey. It would probably be less if the limit for US dollars was not so low, but nonetheless, the popularity of cryptocurrencies has grown, even despite 30% fees on BTC purchases during peak periods.

However, the current global crisis has shown that bitcoin and other cryptocurrencies did not pass the test. In just a few days, the entire market collapsed by 50%, just the same way the stock markets did. Many decentralized finance projects are now on the edge of subsistence. It became clear that for now, cryptocurrency is not a safe haven when it comes to the global level of trouble.

However, the total downfall opened up additional investment opportunities, and it should also be noted that the interest in cryptocurrencies is still growing. So far, it can be said that during the local crisis, the demand for BTC, gold, and similar assets exceeds the daily average. At the same time, the position of the regulator will not be decisive — residents will still find ways to buy the assets where their savings have a greater chance of being preserved. As for the global upheaval, a small number of economists can now certainly forecast what is worth investing to.