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Bitcoin, a safe haven against inflation?

Bitcoin has similar characteristics to gold, can it become a safe haven against the risk of inflation?

30/09/2022




Bitcoin is regularly referred to as digital gold or gold 3.0. What are the similarities between these two assets and how can they be called a safe haven?



What is Bitcoin ?


Bitcoin was created by a certain Satoshi Nakamoto, whose identity remains a mystery. He published a white paper in 2008 in which he explained how Bitcoin works. He describes it as a peer-to-peer electronic payment system. This means that no authority can exercise control over it. It works in an autonomous and decentralized way thanks to the blockchain technology.


Blockchain allows information to be stored and transmitted in a completely transparent and secure manner. In other words, it is a huge database that gathers the complete history of users' transactions. No individual, not even Satoshi Nakamoto, has access to these blocks and has no possibility to modify them, which guarantees the security of the blockchain.



The creation of Bitcoin


The process of creating bitcoins is called mining. The process of mining allows the encryption of each transaction to secure the network and allow the transmission of transactions.

Each user involved in securing the network is called a miner. These miners are actually computer equipment with immense computing power. Their mission is to solve equations as quickly as possible compared to the other miners with whom they are competing. The first miner to succeed is rewarded with bitcoins as an incentive to participate in securing the network.


Like gold, the amount of bitcoins available is limited. Only 21 million units will be issued and not one more! As of today and shortly after 14 years since its creation, more than 90% of Bitcoins have already been put into circulation. According to our estimates, the last bitcoin will be created in 2140.



The release of bitcoins


Bitcoin was designed so that the market supply would shrink over time. Every 4 years, we can witness what is called the Halving. This event aims to halve the mining rewards and therefore halve the release of new bitcoins. More concretely, this halving divides by two the quantity of bitcoins per block and not the quantity of blocks issued. This is like cutting a page in half.


So far, we have seen three halving events in the history of Bitcoin. The next one will take place in 2024 and will again drastically reduce the mining rewards.



Is Bitcoin digital gold?


If we look past the technological innovations of the blockchain, we can find great similarities between gold and bitcoin.


It is mainly the aspect of scarcity that makes this comparison relevant and gives Bitcoin the name digital gold.

Like Bitcoin, each year a certain amount of gold is mined and put into circulation, increasing the amount of gold available and thus influencing its value.


The "Stock to Flow" indicator allows us to estimate this impact. First of all, this indicator allows us to estimate the scarcity of a precious metal or an asset by dividing its overall quantity in circulation by the quantity put into circulation each year. The higher the result, the less the quantity issued each year will have a significant impact on the price of the asset.


Let's take a concrete example: The quantity of gold in circulation in 2021 is estimated at 180,000 tons, for a quantity issued of about 3,200 tons per year. This represents a "stock to flow" ratio of 55, and an increase in the quantity of gold of about 1.9% per year.

As for Bitcoin, since 2020 the stock to flow ratio is relatively similar to that of gold, being around 53.


Since gold and Bitcoin have relatively similar "stock to flow" ratios, the aspect of Bitcoin as a store of value, just like gold, becomes stronger every year. It is thus the scarcity of Bitcoin that gives the name of digital gold to the market's leading cryptocurrency.



Inflation pushes us towards safe havens


We are currently going through a period of economic crisis and significant monetary risk. With inflation exceeding the 10% threshold in Europe, confidence in fiat currencies is diminishing day by day.


Historically, gold has always been a safe haven, being the security investment par excellence to protect oneself from periods of crisis. Its price tends to rise in times of crisis while stocks lose value.


This crisis has confirmed once again the aspect of refuge value of gold with an increase in its price of 13% compared to October 2021.

If we follow this logic, Bitcoin should also appreciate, except that the opposite effect is occurring...



A completely different reality


On paper, Bitcoin meets all the conditions to be a safe haven during a period of high inflation. It should then follow a similar trend to gold and see its price rise since October 2021.


However, this is a completely different reality. We can see that Bitcoin's price is currently correlated to the stock market. Its high volatility creates fear among investors who tend to favor the US dollar. The price of Bitcoin has in fact been divided by 3 since last October, going from 61,000€ to 20,000€.



A trend destined to change


Each fiat currency is controlled by a financial institution that we must trust in the management of the currency and their ability to overcome economic problems.


Bitcoin is decentralized and not controlled by any institution. When its market is more capitalized, its price will be more stable. We can then assume that it will fully play its role as a safe haven and an asset uncorrelated to economic crises.


Where to buy bitcoin? It is advisable to invest in crypto-currencies with Digital Asset Service Providers (DASPs) regulated by Autorité des Marchés Financiers (AMF). This is the case of the French fintech Ambrosia, which offers to diversify its savings and invest in the safe haven of tomorrow.

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