Every year I teach an investments class to undergraduate students. Tracking the types of questions they ask is useful in gauging sentiment.
Right after the COVID-19 pandemic, I started getting questions about Bitcoin and cryptocurrency. About two years ago, the interest in Bitcoin peaked. But in the last six months, the questions about crypto have stopped.
Following Trump’s election victory in late 2024, Bitcoin prices jumped. The administration had big plans to expand the crypto industry in the US and worldwide. And they’ve largely followed through. It is the investors that have cooled off. Bitcoin prices are lower today than when Trump took office.
In the last year, geopolitical uncertainty has sent gold and silver prices soaring. But crypto prices have fallen. What was once touted as the new safe-haven has turned out to be anything but. In fact, crypto prices are generally positively correlated with stock markets. Why did crypto disappoint?
The role of supply
One key property of a safe-haven asset is that its supply must be limited. Precious metals like gold and silver are expensive to mine and produce. This naturally limits supply. At first glance, it appears crypto shares this property, as the supply of Bitcoins is built into its algorithm. Bitcoins will become increasingly expensive to mine, and eventually the supply will be capped.
If Bitcoin were the only cryptocurrency out there, there’s a good chance it would behave like a safe-haven asset. But this is far from the case. Starting a new cryptocurrency turns out to be surprisingly easy. There are companies that will help you launch an initial coin offering (ICO) for a modest fee.
A recent study indicated that around 80% of ICOs turned out to be scams. Approximately 90% of ICOs have lost money for their initial investors.
When President Trump took office, he launched $Trump coins. In the initial euphoria, the price peaked at over $44. Today each coin is worth just over $5.
ICOs have been successful in raising money for their founders. But they have led to losses for most investors. And herein lies the problem with crypto. There is no limit to the supply of crypto. As a digital asset, it is easy to create new coins. Unlike currency that is controlled by government, no one can limit the supply of crypto.
Digital assets cannot be safe-havens
There’s a fundamental tension between a pure digital asset and a true safe-haven. In a real crisis or emergency, will you be able to access your crypto? If the internet shuts down, does crypto have any value? A pure digital asset only works if all the infrastructure around it works too. A true safe-haven asset is one that can be used even when all else fails.
Crypto will play an important role in the global financial system. It will make transactions faster and easier, especially across borders. But it is not going to be a safe-haven.
Disclaimer:
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
Disclosure: The writer does not hold any of the securities discussed in this article.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.