With the proposed imposition of a substantial number of tariffs on global trading partners of the U.S., as of April 3 the stock market was buckling. Further downside may be in the cards in the short term as well as in the long term, if the tariffs inflict a recession on the country, or perhaps if they exacerbate inflation. It goes without saying that the environment is bearish.
But Bitcoin (BTC -2.78%) is exhibiting some very interesting behavior at the moment. It might even be confirming a hypothesized part of its investment thesis that wasn't fully supported by the evidence before this. And if that is indeed what it's doing, it's another reason to load up on the coin, so let's investigate.
Is this the proof of concept for the coin being a safe haven?
One of the main ideas in favor of buying Bitcoin is that it's an asset that isn't tightly correlated with the traditional financial sector. While it's questionable whether that's actually true, given that many major banks now hold it, the point is that if it isn't correlated, it shouldn't go up or down depending on what's happening in the stock market or the global economy. Therefore, it could be an effective hedge against problems in the markets or turbulence in the world.
On its face of it, the idea could work. It isn't tied directly to economic fundamentals, and its value is pretty much exclusively derived from its inherent scarcity, as well as the fact that there's an army of die-hard evangelists willing to buy it at practically any price. But, at least until recently, the historical data were shaky.
In its lifetime, Bitcoin has experienced numerous dramatic drawdowns that shaved off 80% of its value or even more. Recovering and powering beyond those troughs took at least a few years on average. Nobody would consider that a safe asset to hold when times get rough. That paradigm might be changing in real time, though.
Consider this chart depicting Bitcoin's performance against exchange-traded funds (ETFs) that track the major stock market indexes:
Notice anything? While every major grouping of stocks was getting hammered by the news of tariffs looming, Bitcoin's price held steady. It didn't drop like everything else, and that's one key thing that bears deeper exploration in a moment.
For now, consider this next chart:
The coin didn't flinch during the entire period of anxiety leading up to the culmination of the market's fears on April 2. It went up. But what does that mean, and why is it so important in the bigger scheme of why the coin is worth buying and holding?
In short, if Bitcoin stands tall when everything else is struggling, it means there's some meat on the bone of the argument that it's an uncorrelated asset relative to the traditional financial system. In other words, it could be finally showing its capability as a safe haven to live up to the "digital gold" moniker that's long been more of an aspiration than a fact.
Things could still get rocky, but there's a clear action to take
The real test for Bitcoin's safety is still on the way. There might be a lot more turbulence in the markets coming soon, especially if the tariffs have destructive economic effects around the world.
If there's a recession caused by the tariffs in the U.S. or elsewhere, it's inevitable that some holders will need to liquidate their Bitcoin to pay the bills. The question is whether they would do so as one of the first assets they sell, or as one of the last.
But even in that bearish setup, it's important to note that there can only ever be 21 million Bitcoin mined. And the difficulty of mining it will only increase over time, with an ever-higher amount of effort yielding lower and lower returns.
So, the core value-generating mechanism of scarcity is going to grind onward even if the price suffers during a tough economy. It's worth buying today at its current price to get the upside from its long grind toward being in shorter supply.
But imagine if Bitcoin passes through a general rout of the financial markets more or less unscathed. That would confirm its characteristics as a fairly safe investment and, if anything, generate even more demand for the coin. In such a situation, it would make sense to buy even more than before, even with a higher price level.
No matter what scenario occurs, there's no need to rush to be buying Bitcoin today, provided that you're willing to hold it for the many years that will be necessary for its thesis to fully play out in your favor. Consider setting up a dollar-cost averaging strategy to start building up exposure a little bit more aggressively than you did before if it continues to show signs of strength amid this tariff-derived instability; the longer it resists downward movement, the more its long-term potential is going to be confirmed.
