Posted on March 5, 2020
Global piggy bank for everyone
Bitcoin has arrived in the financial world. Among financial analysts, there is much debate about what kind of asset Bitcoin represents. A much sought-after association is that of digital gold. Like gold, Bitcoin is no one’s obligation and therefore follows pretty much the same narrative as the yellow precious metal.
As an asset, the cryptoasset also shows a persistent non-correlation to stocks and bonds as well as to gold itself. In times of the everything-bubble, when more and more assets are moving in lockstep in the financial markets, a potentially uncorrelated asset increasingly attracts the interest of investors. From a portfolio point of view, as financial theory shows, based on past data it actually makes sense to have invested a few percents of one’s total portfolio investment in Bitcoin. With Bitcoin, the risk-adjusted return of a portfolio is much better than without.
It is this pitch that should convince more and more investors of a Bitcoin investment today. In combination, the promise is: Bitcoin is an uncorrelated safe haven. In view of the nature and the conception of the cryptoasset, this is a quite plausible promise.
It is still too early
In reality, however, things are more complicated. Bitcoin’s historical performance is a given, but past figures can never simply be blindly extrapolated into the future. And Bitcoin does not yet act as a real safe haven in the investment context. The financial market fears surrounding the coronavirus have shown this clearly (although basing one’s judgment on such a short time frame is just not how one should approach the question of whether Bitcoin is a safe haven or not).
Bitcoin aficionados, who already advertise the cryptoasset as an uncorrelated asset and a refuge asset in market downturns or even in times of crisis, are fighting an uphill battle. Even though Bitcoin clearly has the stuff for the uncorrelated safe haven, its existence is still too young, its development too rapid and its alternative still too underestimated to actually behave like a safe haven asset. In other words: Sometimes the narrative is correct and it works out with the correlation. And then again it’s not really the case and Bitcoin behaves precisely contrary to expectations.
What can you rely on?
This persistent fuzziness of Bitcoin’s behavior as a financial macro asset is ultimately the reason why many smart investors, so-called smart money, are still hesitant about Bitcoin. This category includes investors such as Ray Dalio, who, according to public information, has not yet invested in Bitcoin. After all, investment experts are ultimately looking for “hard” facts, and these still seem to be too sparsely available in the eyes of a large proportion of smart money investors. So if institutional investors and smart money continue to stay away from Bitcoin, shouldn’t the financial layman of all people also keep his hands off the cryptocurrency? Such a conclusion seems to make sense but is likely to be wrong when properly analyzed.
As a financial layman, asset allocation and portfolio theory quickly become too much to handle. Since you have your own job, there is hardly any time to deal with it. Nevertheless, as the figures show, you should invest your savings in the financial markets in order to escape the creeping devaluation of cash and bank deposits. In the absence of alternatives, laymen are forced to invest in complicated financial plans through investment consultants with their bank.
In earlier times, our great-grandparents built up their retirement provisions mainly through hoards. Gradually turning away from the gold standard and the transition to pure paper currencies, this became increasingly difficult. When our fiat money was finally separated from gold in 1971, an ongoing systemic credit creation was institutionalized and mere hoarding turned into a strategy, which is no longer a meaningful activity for the ordinary citizen.
A new way of hoarding
With the emergence of Bitcoin, this has changed. People now have a new way to hoard. Because of its global nature, Bitcoin is basically open to everyone on the planet. Its digital nature also facilitates safekeeping. Certainly, the Bitcoin world is still a red rag to many people and therefore no less complex than ordinary investments. However, once you have purchased the infrastructure (mobile phone, computer, hard wallet) and understood one of the different procedures for purchasing Bitcoin, you can do it again and again. From then on, no additional effort is required.
Because of its absolute scarcity, Bitcoin represents the ultimate hoardable commodity. There will never be more than 21 million Bitcoin. The more people discover this global piggy bank for themselves, the more likely it is that the demand for Bitcoin will exceed the new supply of Bitcoin units in the long term. Already today, convinced Bitcoiners have stiffened to buy Bitcoin at regular intervals. As is still customary in church circles today, they pay tithes to the Bitcoin network in the form of fiat money. Assuming that the Bitcoin protocol does not experience a lasting shock over the next few years – a self-fulfilling prophecy seems pre-programmed.
Bitcoin is predestined for hoarding. As such, it provides a means and tool to escape the fight against hoarding. Such a tool has always pervaded politics and the history of ideas. What today is usually described as currency reforms in history books, are ultimately just anti-hoarding efforts by the state. Other current manifestations of this fight against hoarding are the policies of quantitative easing by central banks and the negative interest rates that are already a reality today. Bitcoin is creating a new opportunity for exit here. As a self-sufficient individual, one should not just diversify within the system, but be able to exit it independently. Bitcoin is a new global liquidity pool, that everyone on this planet can use to put in money on different occasions, at different times and in different places and take it out again whenever one pleases or has to.
This article was made possible with the kind support of Bitalo, the first crypto exchange in Germany completely regulated by the BaFIN (https://bitalo.de).