For Bitcoin, with rising global uncertainty, what determines its value?
In just three months, 2020 has managed to provide quite a few surprises. The year started off with a lot of geopolitical tension between the US and Iran and has now progressed to the COVID-19 pandemic which has forced most economies into harrowing circumstances. With the rising global uncertainty, investors have also looked to certain assets as a hedge in times like these.
The liquidity crisis for large investors brought down Bitcoin’s price drastically in a matter of hours, earlier in the month. This once again highlighted concerns regarding which assets offer the best hedge for investors. Robert Breedlove, Founder, and CEO, Parallax Digital, on the latest episode of the Bitcoin Echo Chamber podcast, commented on the growing uncertainty in the market, the role Bitcoin and gold plays and what the rush to the US dollar represents. He said,
“In terms of flight to safety, there’s a bid for the pure optionality of cash as uncertainty in the world increases…You’re more uncertain about what’s in front of you, so you’re going to slow down so you have more optionality. That’s slowing down is an accumulation of cash, basically. And for better or worse, right now, the US dollar is the most liquid instrument in the world.”
Gold has traditionally been considered to be a safe-haven asset. Dissecting the reasons behind its value, Breedlove, suggested that gold and Bitcoin fulfill the scarcity quotient. However, the value of assets such as gold is the result of the cost of producing it. He said,
“It’s really not this scarcity of gold per se. It’s actually the energy necessary to obtain it. And that’s the same truth with Bitcoin. The energy necessary to obtain it gives it its value. So another way of looking at it, in economics, commodity prices tend to converge their marginal costs of production.”
For Bitcoin, he added that “The same is true for Bitcoin, as its hash rate grows, the mining market becomes more competitive. It becomes more and more expensive.
As per data from Coinmetrics, Bitcoin’s difficulty rate has been on a steady rise. However, after the recent price drop, there has been a slight lowering of the difficulty rate.
Interestingly a recent study published by the University of Pretoria noted that heightened levels of geopolitical risk may actually benefit the price of Bitcoin. It said,
“Heightened levels of GPR are likely to affect positively Bitcoin prices as investors consider Bitcoin as a hedge against global uncertainties.”