In its brief history, Bitcoin (BTC) was viewed as anything but centralized, sovereign, and censable. The crypto-asset was created by a pseudonymous person, is backed up by a global group of miners and is not supported by any government, traditional financial system or common entity.
As a result, many have viewed Bitcoin and its brothers – other digital assets – as a much-needed escape from fiat and government abuse. In fact, BTC was released in the wake (and apparently as an afterthought) of the 2008 Great Depression, and many who have flocked to cryptocurrency since are staunch supporters of anti-establishment.
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However, some have denied this key narrative. Theory cynics note that BTC is too nascent to be used as a proper store of value and cite the periods of volatility, especially the downturns, as the perfect example. Regardless, a massive cryptocurrency firm recently outlined why these naysayers might be wrong in their postulate.
Bitcoin as a macroeconomic hedge
Grayscale’s industry-renowned research department recently released a report entitled “Hedging Global Liquidity Risk with Bitcoin”. In it, the company explained how the leading cryptocurrency is used as a hedge in financial crises and times of geopolitical turbulence.
More specifically, the crypto investment firm looked at how the asset could be used in battles where there is a high “liquidity risk”, the “risk of real wealth deterioration due to an imbalance in the supply of money and credit versus debt”. in a certain economy. “
To support this point, Grayscale looks at three main aspects of Bitcoin’s existence: store of value, ability to spend, and opportunity to grow.
First, because of its properties, BTC can act (and has been proven) better as a store of value than gold. In contrast to metal, crypto is mathematically scarce and limited to 21 million units; BTC is decentralized and verifiable over the internet; BTC is portable and divisible by digital technologies and cannot be confiscated.
Gold, on the other hand, has unlimited supply, risks of centralization, an inability to easily divide and move around, and concerns about its purity. The following graphic from Grayscale sums up this argument pretty well.
Second, Grayscale claims that because of its similar properties to physical cash, Bitcoin will keep a solid value proposition during a liquidity crisis. They are hoping for the most recent acquisitions by Whole Foods, AT&T, Overstock.com, Microsoft, Expedia, PayPal and Dell to back up their claim.
Third, they find that blockchain technologies’ potential for growth and value creation will only fuel demand, which should mitigate most, if not all, of the negative effects of a downturn in global markets.
So do these properties help Bitcoin to assert itself in the current geopolitical phase? Well, and that was a while ago.
Grayscale takes into account the fact that Bitcoin was more likely to be used during Grexit (Greece’s debt-driven financial crisis in 2015), the Chinese market collapse in 2015 and 2016, Brexit, a brief period of growth concerns for the US, and the recent debacle in the trade war something has done good for itself.
Indeed, some have argued that the recent political dispute between China and the US was a major contributor to the recent rally in the price of bitcoin and detrimental risk. They write:
“While it is very early in the life cycle of Bitcoin as an investable asset, we have found evidence that it can serve as a hedge in a global liquidity crisis, particularly those that lead to subsequent currency devaluations.”
In fact, this strength is why many love Bitcoin. In fact, Delphi Digital, a New York-based crypto research group, recently pointed out that BTC absolutely outperforms any other asset class, even the riskier, high-yielding blue chips and venture-backed Silicon Valley darlings that have started trading in public markets.
At the time of their analysis (late May), Bitcoin was up over 120% year-to-date, while crude oil and the Nasdaq 100 index were only up 18% and 13%, respectively. It’s an even more scary sight for time-tested assets like gold, forex, and government bonds, which are up less than 5% so far. This led the company to conclude that BTC could be the “King of Asset Class Hill”.
Featured image from Shutterstock