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SAFE HAVEN CURRENCIES: DEFINITION, FUNCTION, THE DOLLAR, AND POTENTIAL ROLE OF BITCOIN




By safe haven asset - whether it's a currency, stock, or anything else - we understand it to be one that does not lose value in times of crisis or economic difficulties. Therefore, a safe haven currency is one that, in times of crisis, does not devalue or lose value compared to the rest.

The quintessential safe haven currency is the U.S. dollar. As World War II was drawing to a close, a conference was held in Bretton Woods to establish the foundations of post-war commercial and financial relations; and the United States, the economic victor of the war (although the war had not yet concluded), ensured that its currency enjoyed a privileged position.

For a currency to be considered a safe haven, it is not enough that the economy backing it is important or solid: almost no one considers the Yuan as a safe haven currency, despite the Chinese economy being the second most important in the world. The reason is that the yuan is heavily intervened by the Chinese government; in August 2015, it devalued overnight by 1.9%. In addition, it is necessary for it to have great liquidity in the market - and no currency has as much liquidity as the dollar; more than 50% of the world's central bank foreign exchange reserves are in dollars. Finally, it is necessary that, in case of war, the market considers that it will not be negatively affected.

The currencies that were traditionally considered safe havens are facing three major problems in recent years:

Currencies are backed by economies that are terribly indebted. This will cause problems in the more or less immediate future; one of the ways to end this debt is a more or less covert devaluation, which would mean the safe haven currency would no longer be so.

Central Bank interventions are increasingly and more influenced by their respective governments. For example, the FED made one of the most significant rate hikes in memory right in the middle of an election year, ruining Jimmy Carter's chances of re-election. Today, something like that is completely ruled out.

Economic decisions are increasingly made following more short-term and electoral interests.


What role can bitcoin play as a safe haven currency?


The advantages of bitcoin are evident: Central Bank decisions cannot directly alter its price, which is based on supply and demand; it does not carry the heavy burden of a national debt to answer for and does not evolve following decisions of governments obsessed with re-election.

The main disadvantages of bitcoin as a safe haven currency are also evident: it suffers from very significant price variations, with drops that can exceed 80% and does not have a national economy to support it. The first factor is very serious, and if it is not corrected or, at least, the drops are not so drastic, it directly prevents bitcoin from being considered as a safe haven currency. The second factor, the absence of an economy (or economies) to support it, is the great unknown: on a global scale and over such a prolonged period of time, I do not remember a similar precedent.



The H&B team.

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