Crypto Long & Short: Bitcoin Is More Than a Hedge Against Inflation – It’s a Hedge Against ‘Crazy’
As the year that felt like a decade of speed draws to a close, some of us try to figure out the timeline of the tales and events. Most of us (myself included) fail. And that in itself is a fascinating narrative that sheds light on the Bitcoin rally.
Take me with you while I try to explain.
On the one hand, the price of Bitcoin has risen rapidly and institutional support from traditional investors and companies that see potential in crypto assets and markets is being brought together.
Related: First Mover: As the markets get ugly, bitcoiners are thanking the worldly trend
On the other hand, we have conflicting economic and social trends. We have blind faith in the power of vaccines coupled with opposition to the science of virus transmission. Monetary policy to encourage lending in combination with banks that are unwilling to do so; growing interest in the value of emerging economies with simultaneously increasing default risk; increasing inequality combined with greater protest force; I could go on
These contradicting forces and the uncertainty that swirls around them should encourage us to look closely at the prevailing narratives. However, those of us who have been observing the growing institutional interest in Bitcoin markets have unquestionably accepted the assumption that Bitcoin's inflation-hedging qualities are behind it.
Let's take this apart.
The deflation debate
First, let's look at another pair of conflicting economic trends.
Related: Blockchain Bites: The Battle for Private, Digital Money
Most economists seem to believe that inflation is unlikely to rebound. Depressed consumption and oversupply, the ongoing effects of technology and demographic changes, the low speed of money, and the weak labor market are just some of the factors they point to. These have already led to deflation in some important economic sectors.
The bond market, on the other hand, tells us that inflation concerns are real. The five-year breakeven point, an indicator of inflation expectations calculated using the difference between five-year US Treasuries and inflation-linked government bond securities, is close to its five-year high.
In addition, the yield curve continues to steepen and signals the expectation of higher interest rates in the future if the central banks tackle an impending inflation problem. Given the damage that rising interest rates would do to debt-laden economies, the bond market tells us that they have problems ahead of them.
An inflation hedge
But is that really important for Bitcoin?
Bitcoin is viewed as an inflation hedge, mainly because of its limited supply that is not affected by its price, and its relative attractiveness when real returns go near zero or below.
However, when you buy bitcoin, you are not just doing it to hedge against inflation. You buy Bitcoin to hedge against all other negative consequences that are usually associated with it.
Inflation isn't always bad, though. “Good” inflation, a result of economic growth and low unemployment, which is helping to bridge the gap between supply and demand, encourages investment and even more economic growth.
However, out of control inflation exacerbates poverty, increases insecurity, destroys trust in institutions and can lead to the collapse of social order. This is not isolated to Germany after WWI - we see it today in Venezuela, Zimbabwe, Lebanon, and Argentina, to name a few.
Bitcoin is also a hedge for unstable governments that close bank accounts, police states that want to seize private assets, broken payment rails due to damaged systems or threats from outside cyberattacks, paranoid leaders who want opponents to be disenfranchised, export-protective devaluations that trigger more inflation.
These are less likely in developed countries. But let's not forget that turning points lurk around unexpected corners and that Venezuela was once one of the richest countries in the world and one of the more stable democracies in Latin America.
Bitcoin is a hedge against inflation, but also against political instability and social disruption that shouldn't be ridiculously prepared for when inflation returns.
A dollar devaluation hedge
Bitcoin is also a hedge against a gentler, but equally damaging currency devaluation through loss of confidence.
Traditionally, inflation has moved in parallel with the strength of the local economy. However, this can be triggered by currency weakness, which increases the prices of imported goods.
This is usually corrected when the central bank raises interest rates to counter rising inflation, which increases the attractiveness of the currency relative to others.
In the current environment, given the potentially catastrophic impact on indebted economies, a rise in interest rates can have the opposite effect. The US bond market tells us that it believes interest rates will rise. However, the dollar continues to move lower and could do so even if these rate hikes materialize, as confidence in the US's ability to use traditional instruments effectively could be shaken.
And most of Bitcoin trading is in dollars. When the dollar goes down without the value of Bitcoin declining accordingly (and since this is unrelated to the economy, there is no fundamental reason for it), the BTC / USD ratio goes up.
Bitcoin is a hedge not just for the macroeconomic issues that we need to watch out for. It can also provide ballast against the unforeseen problems waiting to be triggered.
The "crazy" thesis
This underscores another hidden strength of Bitcoin as a fixed asset.
It's unlike any other asset we've seen before: programmatic supply, decentralized governance, fragmented market infrastructure based on technologies developed by an unknown entity and managed by miners, developers and validators in many regions.
It doesn't fit standard economic thinking - and that's why it's perfect for our time.
In a world where in a few months you switched from orthodox monetary policy to the Keynesian economy to MMT, there is no longer any trust in the traditional recipes.
To paraphrase G. K. Chesterton, when you stop believing in traditional recipes, your mind is more open to new ones.
Bitcoin in portfolios is more than a new recipe. It represents the need for a new recipe. It is a safety game against a world where old ideas are in the air and new ones have yet to take root.
It's more than a hedge against inflation: it's also an acceptance that politics and economics can get weird and that untested ideas that aren't tied to macroeconomic characteristics and previous assumptions are worth considering.
It is a hedge against "crazy" which hopefully is not what to expect - but the risk of not preparing for this possibility is almost irresponsible and not even thinking about it is likely to be prohibitively expensive.
Does anyone else know what's going on?
Bitcoin's outperformance in 2020 has to create the asset for even more professional investor attention next year, although we all know that past performance is not an indicator of future performance. Or is it? Momentum trading seems to be the predominant strategy this year, and given the amount of money sloshing around the markets looking for a good return, there is no indication that this will end anytime soon.
On the other hand, all bull markets have to end for some time, even though Bitcoin's underlying fundamentals and investment theses are not deteriorated by vaccine disappointments and worse-than-expected economic numbers - unlike the equity and bond markets.
Scott Minerd, CIO of fund manager Guggenheim Partners, which manages more than $ 230 billion in assets, told Bloomberg TV presenters this week that his company's fundamental analysis shows that bitcoin is worth $ 400,000 should have. This conclusion is based on the scarcity of the asset and its relative value to gold as a percentage of gross domestic product. He also revealed that Guggenheim had started allocating Bitcoin when it was trading at around $ 10,000.
UK-based fund manager Ruffer Investment Company has invested approximately $ 740 million in Bitcoin, which is roughly 2.7% of the company's assets under management. According to the company, the investment was "primarily a portfolio protection measure" to act "as a hedge" against "some of the risks we see in a fragile monetary system and distorted financial markets." Ruffer is known in investment circles as a conservative manager focused on capital preservation. From January to June 2020 it had the best performing active fund in Europe: The LF Ruffer Gold Fund achieved a six-month performance of over 55%. And now it's investing in bitcoin. Ruffer has spoken many times in the past about his inflation concerns. This investment leads me to report to other active managers who are concerned about inflation - their ranks are growing.
One River Asset Management, a $ 1 billion hedge fund specializing in volatility games, as of April 2020, has $ 600 million in Bitcoin and Ether or institutional clients (including Ruffer, the holds a stake in the company) invests in digital asset management. CEO Eric Peters told Bloomberg that One River Digital's crypto holdings will exceed $ 1 billion in early 2021. Alan Howard, co-founder of Brevan Howard Asset Management, participates in One River Digital helping the company provide back-end trading services.
Christopher Wood, global head of equity strategy at investment firm Jefferies, has reduced the recommended exposure in its global model portfolio from 50% gold in favor of Bitcoin. This is all the more remarkable given that this particular portfolio was designed for US pension funds. In addition, he has announced that he will increase exposure to Bitcoin in the event of a correction.
· Jeff Currie, director of commodities research at Goldman Sachs, told Bloomberg that bitcoin is a "hedge against retail inflation" and a proxy for the risk of growth.
· Not a recommendation, but an interesting and potentially useful thread suggested by technology investor Andrew Wilkinson, co-founder of Tiny Capital.
In market developments:
US Crypto Asset Exchange Coinbase has filed preliminary filings with the US Securities and Exchange Commission (SEC) to go public. The Form S-1 is expected to take effect after the SEC completes its review process, subject to market and other conditions. TAKEAWAY: Let's go ... This will create by far the largest publicly traded company in the crypto industry and has been rumored for some time. Not only is it likely to draw even more attention to the crypto markets, but it will likely open up a number of crypto-related listings too, especially given recent price moves and growing institutional interest. What excites me most, aside from how the market rates a systemic crypto market infrastructure business, is a look at the balance sheet and the income statement.
Cboe Global Markets will launch a range of tools for the crypto market in 2021 in a licensing partnership with execution provider CoinRoutes, including cryptocurrency indices, historical data and real-time ticks. TAKEAWAY: Cboe operates the largest options exchange in the United States. This deal comes from a traditional market infrastructure provider and signals the support of the emerging asset group. He points to the introduction of new crypto services and products in the coming years. S&P also recently announced crypto index plans, and other market data providers are likely to join the race to capture the market share of crypto data.
The Chicago Mercantile Exchange (CME) will launch a futures contract on Ether (ETH) in February 2021. TAKEAWAY: This makes a major contribution to validating ETH as a potentially institutional investment. The lack of liquid ETH derivatives for institutional investors has dampened hedging opportunities, and removing these barriers could encourage more professional investors to at least think about their benefits.
Consulting firm Evercore has named PayPal its top payment portfolio, also because it believes the company's cryptocurrency services could be beneficial for customer loyalty and transaction margin. TAKEAWAY: This is not just encouraging investors to consider companies adopting Crypto Asset Services. It is also encouraging more companies to offer crypto asset services because who wouldn't want investors to look at them?
Sovryn, a self-billed “decentralized platform for trading and lending Bitcoin”, has launched the RSK Bitcoin sidechain with a financing of USD 2.1 million. TAKEAWAY: There is a lot of debate about whether Bitcoin could ever be used for smart contracts. This is a reminder that the jury is still vacant and technological advances show pretty well that what many consider impossible is not that impossible. As the range of uses that can be built on Bitcoin expands, it could increase its potential value.
SBI Financial Services, the subsidiary of the Japanese technology group SBI Holdings, has acquired the UK-based OTC desk B2C2 for cryptocurrency. TAKEAWAY: This is another example of legacy financing that uses Crypto Asset Services to expand the customer base and sell more to existing customers.
Banca Generali, an Italian private bank focused on wealth management for high net worth individuals, is conducting a $ 14 million investment round in crypto wallet provider Conio and agreeing to offer Conio's services to the bank's customers. TAKEAWAY: Another old bank is preparing to offer crypto asset services to its customers. We'll see a lot more of this in 2021.
You have banks that are building or buying crypto asset services, and you also have crypto firms trying to become banks. The crypto payment company BitPay has registered as a national bank in the United States based in Georgia. TAKEAWAY: If BitPay becomes a national bank, it can operate in any state in the US, while its non-bank competitors will need money transmitter licenses in whichever state they want to operate. This brings an operational advantage and also a strategic advantage is that customers may prefer the additional control of national trust banks compared to companies without a national banking license.
In terms of crypto firms hoping to become banks, crypto asset platform Paxos (which signed up as a federally regulated bank last week) raised $ 142 million in a Series C round. TAKEAWAY: Paxos is becoming a major player in the evolving crypto market infrastructure: In addition to an itBit crypto exchange, Paxos is building a full-stack infrastructure service that includes custody, token securities, stablecoins and more. It supports PayPal's new Bitcoin offering and also counts Credit Suisse, Société Générale and Revolut among its customers. (Paxos founder Charles Cascarilla has been named one of CoinDesk's most influential ones for 2020.) With this level of funding, it will be interesting to see which of their many services they expand or if they add new market tools to the mix.
Crypto Long & Short: Bitcoin is more than a hedge against inflation - it is a hedge against "crazy"
Crypto Long & Short: Bitcoin is more than a hedge against inflation - it is a hedge against "crazy"
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ETHUSD = X.
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