Bitcoin Is A ‘Chaos Hedge, or Schmuck Insurance‘ (#GotBitcoin?)
Morgan Creek Capital CEO Mark Yusko called Bitcoin (BTC) a “chaos hedge, or schmuck insurance,” in an interview with CNBC Fast Money on Aug. 14. Yusko made the comment while explaining the folly in paying too much heed to the daily price movements of BTC. Bitcoin Is A ‘Chaos Hedge, or Schmuck Insurance‘ (#GotBitcoin?)
The interviewer noted that people had been making a big thing of BTC’s recent bull run and apparent correlation with global turmoil. As the turmoil appeared to have gotten worse, and Bitcoin had also gone lower, “should we now throw that narrative out of the window, or at least table it?” she asked.
“People who are watching the daily price of bitcoin are really missing the whole point”
Yusko replied that the daily price of Bitcoin wasn’t the point. “The whole idea of Bitcoin is it’s a store of value,” he said: “It’s a chaos hedge, or schmuck insurance, as I like to call it.” He suggested that people should look at long-term trends, emphasizing that it’s better to own a piece of the network.
Suggesting its role as a counterweight to traditional financial markets, Yusko advised: “You want to have 1, 2, 3, 5% of your net worth in this asset as a hedge, against all the problems that we see in the fiat markets and the equity markets.”
This backs up Yusko’s own remarks back in May, that Bitcoin should be in every investor’s portfolio. However, his suggestion of a 5% investment in bitcoin is massively conservative compared to Morgan Creek Digital founder Anthony Pompliano, who recently revealed that more than 50% of his net worth is in Bitcoin.
Financial System Blind To Crypto’s Deflationary Impact, Says Analyst
Investment strategist William Peets has pointed to a widespread underestimation of the deflationary impact of cryptocurrencies such as Bitcoin and blockchain for global finance.
Peets is currently CIO and portfolio manager for digital asset strategies at Passport Capital.
In an Oct. 30 interview with Real Vision Finance, he said that blockchain represents a generational change in technology with profound implications for the existing financial system — something that most have been too slow to recognize.
Redressing Macro Imbalances
Finance is ripe for disruption by crypto and blockchain, Peets said, noting that application of the technology will eat into the monopoly power of traditional financial services incumbents:
“Security issuance, tokenization of real assets, trading of those assets, custody-all those things can potentially be done in a more efficient manner with distributed ledger technology. And that shrinks the margins of the likes of a State Street or Northern Trust, or these traditional banks and incumbents, again, which is all deflationary.”
He again underscored that a “large portion of the market” remains blind to the potential impact of such far-reaching change, as well as how fast this change could happen.
Post-2008, he argued that the potentially deflationary impact of blockchain could be crucial to mitigate some of the worst dysfunctions of a debt-riven system, stating that:
“What’s going on in the macro environment as it relates to indebtedness and the amount of debt that’s trading out and negative interest rates, it really starts to make you think about the current monetary system, and if that’s sustainable.”
Wake Up Call
As previously reported, analysts consider that even ahead of gaining widespread global traction, the very existence of private decentralized cryptocurrencies such as Bitcoin (BTC) is already having a healthy impact on the global financial sector.
Private digital currencies, a summer 2019 report argued, serve as competition for local investment and thus restrain monetary policy, thereby generating lower inflation.
In a speech at the International Monetary Fund’s general meeting earlier this month, former Bank of England governor Mervyn King told attendees the world was “sleepwalking” into a financial crisis even worse than that of 2008.
Global Protests Reveal Bitcoin’s Limitations
Protests in Hong Kong, Lebanon and Iran have forced cypherpunks to test censorship-resistant technologies in the wild.
But protesters on the ground found they lack internet access during times of civil unrest.
Bitcoin has mainly proven useful for receiving value from abroad to hold and privately store.
Sources in Lebanon and Iran said there is scant liquidity, and since they are cut off from global exchange platforms, digital assets are rarely useful as currency.
In the face of censorship and isolation from their countries’ financial and communication systems, protesters across the globe are testing out bitcoin and other decentralized technologies – then promptly discovering their limitations.
Take Hong Hong, for example, where protests began six months ago against China’s infringements on civil liberties and ramped up on Monday at Hong Kong Polytechnic University as police detained 1,000 protesters.
The former British colony would seem the perfect test case for an open-access financial system resistant to government interference. But that may not yet bet the case.
Take for example, HSBC Holdings reportedly shutting down the bank account of Spark Alliance HK, a local nonprofit focused on civic engagement, because it was associated with protests and the bank was allegedly pressured by Beijing. The move reminded protesters and donors of the need to transact privately, one protestor, who spoke on condition of anonymity, told CoinDesk. Nonprofits like HKMap Live and Hong Kong Free Press already accept bitcoin donations.
However, the Hong Kong protester added, “there is no [internet] connection in the protest area, no matter which service provider you used,” and protesters are generally not clear on how bitcoin would be used by individuals during a time of civil unrest. It is mostly useful for receiving donations from abroad that don’t require prompt liquidity.
Plus, he said protesters who tried mesh-network devices, which basically bounce a message or transaction across a web of devices until it finds a device with internet access, found they were “not useful for a confrontational situation.” Although many protesters use Telegram because it allows chatting without revealing the users’ phone numbers, he said tools that rely on mobile data providers offer limited functionality in times of turmoil.
As with protests in the Middle East, sources in Hong Kong said bitcoin and related technologies are not ready for usage in chaotic environments because the movement is still nascent and money generally relies on network effects. At this point, censorship-resistant technology can still be censored as long as it remains too niche.
“People are moving their money abroad more,” said one Chinese bitcoiner with family in Hong Kong, who asked that her name be withheld for safety. “But it’s from bank to bank, like Hong Kong accounts to Singapore.”
She added it’s harder to get goods and services, including food imported from mainland China and physical cash, in part because 19 percent of Hong Kong bank branches were closed this week due to the chaos.
Further complicating matters, online discourse in general has been further restricted as the protests rage on.
Hong Kong’s High Court issued an interim injunction in October forbidding people from publishing or circulating information that promotes “the use or threat of violence … on any internet-based platform or medium.” Then on Monday, China’s mainland firewall banned the web browser Kuniao, which was often used to access global social media platforms.
Meanwhile in Iran, Revolutionary Guard crackdowns on nationwide protests against rising gas prices and political corruption reportedly left 200 civilians dead and thousands injured.
The Iranian government shut down global internet access for nearly five days (locally hosted websites and services are still operational), and only started to establish limited connectivity again on Thursday.
One Tehran-based bitcoiner, who requested anonymity for safety, was arrested at a protest for taking photos then promptly released. Police searched his phone, including social chats, apps and photos, he said. So he now routinely deletes Twitter direct messages from other bitcoiners.
This bitcoiner has a personal server abroad, and was able to jerry-rig limited internet access through it. According to Bitnodes, there are just six bitcoin nodes operating in Iran.
“I made a secure encryption protocol between data centers and a mobile network,” he said. “I bypassed several servers and networks to reach the edge servers. … Now I have a 100Mbps connection.”
Despite regaining some level of connectivity, he said his bitcoin wallet apps and mobile apps like Telegram are still blocked. It’s especially difficult for Iranians to access foreign servers and infrastructure because many companies ban Iranians for fear of U.S. sanctions.
“We’re locked up in a prison that the U.S. and Iranian governments have built for us,” he said, adding the Blockstream bitcoin satellite and mesh network technologies aren’t useful when you’re in a massive internet desert. “In situations where we don’t have physical connection none of these fucking technologies help us,” he said.
After all, even if he got a transaction through, there are too few tech-savvy recipients to make digital transactions a worthwhile use of his time.
“We need a simple way to connect our devices together,” the anonymous protester said. “We need secure and accessible communication for people.”
This point highlights yet another lesson learned by protestors in Lebanon: Black markets are vulnerable to infiltration from within.
On Tuesday, Lebanese protesters took over Beirut’s Nejmeh Square and stopped parliament from meeting, spurred by a local banking crisis and government corruption.
Lebanese bitcoin trades, predominantly facilitated through WhatsApp, Telegram and Facebook, continue normally with a slight premium. Trading is hampered, according to such group chats, by limited cash access from local banks and financial institutions.
After a week of shuttering branches, the banks reopened this week with a $1,000 withdrawal limit. On Thursday, protesters reportedly entered the central bank to demonstrate that these measures are perceived as the government doing too little, too late to quell the currency crisis.
As one anonymous bitcoin trader said: “There’s no access to liquidity.”
Two weeks ago, a few bitcoin traders found hackers had accessed their mobile phones and stolen cryptocurrency. Local social groups brimmed with concerns about which anonymous trader accounts could be trusted. As reported by the local outlet VDL News, the alleged hacker may have knowledge of the victims’ location and access to a network run by the telecommunications company Touch, because the hack involved intercepting messages at the service level. (Two exchanges associated with the alleged victims denied any hack to their systems on this date.)
“They can hijack WhatsApp, Telegram [accounts],” one alleged hacking victim said. “That means you can’t trust your mobile identity. … They [hackers] can create trouble between parties, fake accounts and impersonation.”
So this hack served as a wake-up call to the local community. In short, there is no substitute for in-person networking and long-standing relationships. Without them, the privacy created by avatars is also a liability.
In all three contexts, current bitcoin infrastructure was found to be insufficient.
While this may be expected of a nascent technology, across user groups the common need was for accessibility.
Both the Chinese and Iranian bitcoiners who spoke to CoinDesk pointed out that most people don’t have the skills, nor the desire, to go “the anarchist route,” as the Chinese bitcoiner put it. The Hong Kong protester added that “most protesters don’t know how to make use of bitcoin in this [activist] context.”
When it’s available, Hong Kong civilians still rely on traditional financial institutions, the Chinese bitcoiner said. LocalBitcoins data on peer-to-peer bitcoin trades in Hong Kong and Iran don’t show any relative spikes, reflecting the same narrative from over-the-counter Lebansese traders. Many bitcoiners prefer to stay deep underground these days, another Tehran-based bitcoiner said, fearful of attracting the attention of authorities on the hunt for people to suspect and arrest.
Scattered and fragmented communities offer scant liquidity on the ground. Broader adoption leads to better usability and privacy, even if only by helping bitcoiners get lost in the crowd.
After all, if bitcoin were more popular in Tehran then users might not fear that usage would attract attention. A third anonymous Iranian source, currently abroad yet deeply involved with the Tehran bitcoin community, said there is a significant legal threat to locals helping neighbors bypass internet censorship.
“People who have servers (hosting websites, etc) in Iran have received SMS mentioning that hosting, selling or distributing any VPN service or proxy in order to access filtered websites (such as Telegram) is illegal … encouraging them to tell on those that are doing so,” he said. “BTS tower SMS-CB technology has been used to send SMS to people in certain areas to leave.”
In these cases, bitcoin has proven most useful to store wealth or receive funds from abroad. Transacting locally is risky. One Lebanses bitcoiner who thwarted a hacker said that luckily he stores half of his savings in a bitcoin hardware wallet, which kept it safe.
“I find it ironic that the first world talks about how bitcoin is freedom to the unbanked, but the unbanked have no way to get bitcoin,” he said. “Bitcoin feels like a novelty at times, or a privilege.”
In fact, Lebanese entrepreneur Dany Moussa told CoinDesk his homeland is predominantly a cash society, so even credit and debit cards might have a learning curve for some. It should also be noted that chatter in Lebanese groups shows hardware wallets don’t always work as designed, so users often need to help each other fix them.
“I think we are still far from serious adoption of crypto in Lebanon for many reasons,” Moussa said. “Lebanese [people] do not have access to exchanges due to restrictions adopted by [Lebanon’s central bank] and lack of coverage from [outside] exchanges.”
When global crypto exchanges and service providers ban a population due to sanctions or compliance concerns, as they have with Iranians and Lebanese people to some extent, ties to global communities can provide a lifeline. Across the board, sources said that connectivity and accessibility on the ground were the two fundamental challenges.
Money is, after all, primarily a social construct. The dream of a lone anarchist striking out only works if his goal is to flee, not stay.
“Consider two or three people who can communicate with the Blockstream satellites, what would be the benefit [of using bitcoin]?” the Tehran-based bitcoiner said. “Not all people are hackers and network experts. … When we talk about a payment network it must have a significant number of members.”
Global Debt Reaches New Highs — Is BTC A Solution Or A Beneficiary?
Global debt has surpassed $250 trillion. That’s 320% of gross domestic product, announced the Institute of International Finance on Nov. 14. Emerging market debt also hit a record $71.4 trillion, 220% of GDP.
This has set off alarm bells. After all, the projected year-end amount of $255 trillion is equal to $32,500 for each person on the planet, or $12.1 million per Bitcoin (BTC), as Cointelegraph reported.
But, as mind-boggling as it may appear, is this total debt really so bad? Debt, after all, can stimulate growth, enabling a country to build roads, bridges, canals and universities, as well as pay pensions and ensure a higher well-being of its nation. It can raise a nation’s standard of living. IIF spokesperson Dylan Riddle told Cointelegraph:
“That level of debt is a point of concern because it represents a massive accumulation of debt in the last decade. Since the last recession, the world has added about $75 trillion worth of debt.”
However, things may not be so dire. As William D. Lastrapes, professor of economics at the University of Georgia, told Cointelegraph:
“It is difficult to say if global debt of $255 trillion is too much. It depends on which countries contribute to this — seems to be mostly US and China — and many, many other factors.”
The challenge with regard to debt is to know how much is too much. Economists have been battling over this point for years, usually in terms of the debt-to-GDP ratio. A highly influential paper earlier this decade placed the tipping point at 90% — that is, a country’s economic growth drops significantly when the size of its debt rises above 90% of its gross domestic product.
The 2010 paper “Growth in a Time of Debt,” by Carmen Reinhart and Kenneth Rogoff, was published around the time Greece’s economy was floundering, and the paper’s conclusion reportedly spurred public and quasi public officials — including those at the International Monetary Fund — to flip from stimulative to austerity in their response to Greece’s debt woes.
The paper also drew scathing attacks, most prominently from economist and Nobel laureate Paul Krugman, who censured the authors’ “coding” error, deplored the “austerity mania” that their paper unleashed among policymakers, and chided them for confusing correlation with causation. On the subject, Lastrapes noted to Cointelegraph:
“Public debt is not intrinsically a bad thing. It allows governments to separate the ‘timing’ of its expenditures from the ‘timing’ of its tax revenues. Without the ability to borrow, governments would be able to spend only as taxes are collected, which is in general not optimal (for example, think of public investment in infrastructure).”
Conversely, a low debt ratio is no guarantee of a healthy economy. As Lastrapes has noted elsewhere, Venezuela’s sovereign debt was only 23% of its GDP in 2017, yet its economy has been in turmoil for several years. Still, some in the crypto community have been skeptical about an imminent economic collapse. Vinny Lingham, CEO of blockchain identity platform Civic, told Cointelegraph:
“We’re way past the point where the bubble should have burst. It should have happened long ago. We’re in uncharted territory now.”
With the Institute of International Finance’s global debt ratio now at 320% — well beyond Rogoff’s 90% “tipping point” — and no apparent signs of Armageddon’s arrival, it appears the debt-ratio model might be flawed, Lingham suggested. Therefore, a new debt model that reflects reality may now be needed. In any case, he believes some intellectual humility is called for. As Lingham said, “Things have become unpredictable.”
It seems hard to believe, though, that living on borrowed money won’t catch up with everyone eventually. As the IIF noted in its Nov. 14 commentary, “With limited room for further monetary easing, debt service costs will be an increasing constraint on fiscal policy.” Lastrapes sees it another way. He told Cointelegraph:
“Government debt becomes problematic when it appears likely (in the eyes of bondholders) that future tax collections will be insufficient for the debt to be paid back. Debt default is the ultimate sign of fiscal irresponsibility and will harm a defaulting nation’s ability to borrow in the future.”
For a country like the United States, which is servicing its debt and has sustained growth as well as strong economic and fiscal institutions, large amounts of debt are not necessarily a problem, Lastrapes added. The fact that today’s interest rates and treasury yields remain low reinforces this view.
But the U.S. situation does not necessarily reflect that of the developing world. Countries like Argentina, Turkey and Iran may not be able to service their debt, and will consequently be blocked from investing in infrastructure, education, health and other needs.
Would Bitcoin Soar If The Bubble Bursts?
The global debt mountain referenced by the IIF drew the attention of the crypto community as well. The assumption of some is that the price of Bitcoin and other cryptocurrencies could soar if and when the debt bubble bursts. As Erik Voorhees said on an earlier occasion with respect to U.S. debt and a potential situation in which corporations will become unable to repay their debts, “fiat is doomed… watch what happens to crypto.”
This remains a point of debate though. The fact of the matter, said Lingham, is that if the world decided tomorrow to abandon fiat currency and embrace Bitcoin, the cryptocurrency couldn’t handle it. Bitcoin lacks scale — still only able to handle around 7 transactions per second compared to Mastercard’s claim of processing 50,000 TPS. The cost of a single Bitcoin transaction would skyrocket, perhaps into the thousands of dollars.
That said, many crypto evangelists can envision the collapse of the post-Bretton Woods banking system, and its replacement by Bitcoin as the world’s reserve currency. A January white paper laid out the steps by which this might actually occur, though it first requires the price of Bitcoin to reach stratospheric heights:
“If Bitcoin climbs to $10 million per Bitcoin, it could provide the world community with a stable currency, replace sovereign currencies, and act as the reserve currency of the world incapable of inflation or deflation. It would represent the ultimate ‘Store of Value.’”
Why $10 million? At that point, Bitcoin provides a sufficient reserve to alleviate the world’s debt burden. The authors add:
“Bitcoin would be worth between $180 trillion and $210 trillion (depending on when that price was reached). Assuming world debt had reached $500 trillion at that time, remember it has grown by 394% over the past 20 years, Bitcoin would represent a 40% reserve against the debt.”
A realistic possibility? Maybe not, the authors allow. It would require, among other things, the destruction of all altcoins — as they suppress demand for Bitcoin — as well as Bitcoin overtaking gold as a store of value when it is somewhere between the $100,000 and $400,000 price mark.
Also, Bitcoin’s developers have to deliver on their promise of speed, transparency and cost — a big “if.” Lingham, for one, remains skeptical: “The Apples, Googles — the world’s largest companies — are using U.S. dollars still. When they switch over to Bitcoin, then we can have that conversation.”
Men With Guns
Crypto utopians often imply that fiat currencies like the U.S. dollar are just a social convention with nothing behind them — since 1944, at least, when the dollar became untethered from gold. But that isn’t quite true, according to Krugman:
“Ultimately, it’s backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities — liabilities it’s able to enforce because it’s a government. If you like, fiat currencies have underlying value because men with guns say they do. And this means that their value isn’t a bubble that can collapse if people lose faith.”
A Lesser Role For Crypto?
Assuming for the moment that Bitcoin will not supplant the U.S. dollar as the world’s reserve currency anytime soon: Is there a positive, if reduced, role for cryptos and blockchain technology vis-a-vis global debt? IIF’s Riddle told Cointelegraph:
“Crypto doesn’t play a role currently, however technology solutions like blockchain could one day potentially be used to increase debt transparency globally.”
Those solutions could be, for example, the private sector lending to the most vulnerable low-income countries, “or any type of lending.” According to the IIF, “Greater transparency will in turn facilitate good governance, aid the fight against corruption and support debt sustainability.”
Public debt recorded on a blockchain could make it easier for lenders and borrowers both to evaluate emerging risks associated with debt, avoiding problems like the recent Tuna Bonds scandal in Mozambique, where that nation’s government failed to disclose $1.2 billion in loans to the IMF as required under a funding accord.
In sum, while debt ratios are historically high, they still may not be signalling imminent global collapse. Moreover, one shouldn’t count on Bitcoin replacing the U.S. dollar as the world’s reserve currency anytime soon or if ever, according to some. But, in the near and intermediate future, there are still some useful ways crypto and blockchain technology can impact global debt, such as supporting lending transparency in emerging markets.
Why Eurasian Debt, Economic Uncertainty Make a Bull Case For Bitcoin
Bitcoin (BTC) bulls will no doubt keenly watch talk of the need for “a new, neutral global reserve asset” at the heart of the traditional financial sphere.
Financial Times business columnist and associate editor Rana Foroohar published an opinion piece on Nov. 25, pointing to the renewed, half-justified “paranoia” of the “gold bugs,” which has only been compounded by comments from investors and central bankers in recent weeks.
“You have to really believe the sky is falling in order to hoard physical bars in a digital age,” Foroohor writes.
And while she does not put her faith in gold itself, the very talk of gold points to a systemically fragile post-2008 horizon and the new urgencies ushered in by an era of acute geopolitical uncertainties.
Need for an asset “that’s not somebody else’s liability”
Foroohar points to the Dutch Central Bank’s (DCB) October warning — one that shocked many — that in the event of a monetary reset and “if the system collapses”:
“The gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.”
The world’s 58th wealthiest person — billionaire investor and hedge fund manager Ray Dalio — echoed this at the Institute for International Finance conference this fall, raising the possibility of a potential flight to gold should America’s global creditors betray any signs of jitteriness.
As early as at least 2016, Foroohar notes, prominent voices like JPMorgan chief Jamie Dimon and hedge fund manager Stanley Druckenmiller have alleged there is an “unsustainable” fiscal situation, pointing to unfunded pension and healthcare entitlements in the United States.
To offset the fiscal imbalance, the U.S. remains locked into inflating its own balance sheet, keeping interest rates low — or even negative. Pushed to the extreme — in this view — this could depreciate the dollar, creating a situation in which investors no longer want to hold federal debt nor the currency itself, Foorohar notes.
The need for an asset “that’s not somebody else’s liability” — in Dalio’s words — points to gold or something else altogether.
Eurasia’s Move Away From The Dollar?
With China recently issuing its first euro-denominated bonds in 15 years, deepening ties with European firms and edging away from the petrodollar, the gradual de-dollarization of Eurasia is another unfolding factor that could force America to sell dollars in order to settle its balance of payments “in a new, neutral reserve asset,” as Foroohar writes.
Parallel to Dalio and the DCB this October, Cameron Winklevoss — one half of the eponymous family office Winklevoss Capital and co-founder of the Gemini crypto exchange — argued that, in serving as a “Source of Truth,” Bitcoin can offer benefits that aren’t confined to being a safe-haven asset or mere “digital gold.”
The twins have also previously forecast the cryptocurrency will ultimately surpass the ~$7 trillion market cap of the precious metal.
1% Bitcoin No Longer ‘Crazy’ For Portfolios, Says Morgan Creek CEO
Bitcoin (BTC) represents an investment in technology and innovation, making it a must-have in any portfolio, suggested the CEO of Morgan Creek Capital, Mark Yusko, in an interview with Max Keiser on the Keiser Report, published on Jan. 30.
Morgan Creek CEO: Bitcoin Exposure Boosts Portfolios
Keiser began by noting that portfolios with even 1% exposure to Bitcoin have more alpha or, in other words, have outperformed just about everything over the past five years.
By definition, alpha represents the performance of a portfolio relative to a benchmark. Portfolio managers seek to generate alpha by diversifying portfolios to remove unsystematic risk.
“It’s incredible,” said Yusko. “If you took 1% of all the endowments and foundations five years ago, that would have been $6.7 billion out of $670 billion. You took that one percent — half percent from stocks, half from bonds — instead of making 7.2%, which is what they made, they would have made 9.2% or 200 basis points better. Two on 7.2% is a lot of alpha.”
But while conceding that Bitcoin had a non-zero probability of price going to zero, he also pointed out that it offers ten-to-one downside capture. This, according to Yusko, makes Bitcoin one of the most asymmetric assets he has ever seen in his career.
He also suggests that it will become increasingly normal for traditional funds to seek exposure, continuing:
“So the idea that ten years from now we won’t look back and say that as a fiduciary of a pension fund, sovereign wealth, family office, etc. you had to have exposure to this asset, is crazy.”
Bitcoin Showing Staying Power As An Asset Class
Evidence is indeed mounting that Bitcoin becoming increasingly accepted among investors, particularly as the price of BTC is currently climbing back toward the $10,00 mark.
With Bitcoin’s rising volumes and open interest on the Chicago Mercantile Exchange, new institutional investment products, not to mention outperforming everything including Amazon stock and gold in recent years, BTC is looking increasingly attractive to investors.
Admittedly, many fund managers still view Bitcoin as some scam or scheme, notes Yusko, as opposed to what he says is truly an evolution of technology, in which Bitcoin will play a fundamental role as a base layer protocol.
Keiser: “You’re Owning A Piece Of The Protocol”
But while both Keiser and Yusko agreed that most cryptocurrencies will fail, Bitcoin and perhaps a handful of other cryptocurrencies may provide an opportunity that’s quite different from dot-com era tech stocks.
“The protocol is the application,” said Keiser, equating it to an opportunity of buying shares in the concept of email in the 1990s. He continued:
“With Bitcoin, you have that opportunity. You’re owning a piece of the protocol that’s dominating.”
As Cointelegraph reported last month, Bitcoin has dwarfed all other assets in returns over the past decade at nearly 9,000,000 percent. So far this year, however, BTC isn’t even the best performing asset. Tesla stock, or TSLA, is up 38% year to date compared to Bitcoin’s 30%.
In October, Cointelegraph reported on investment management firm VanEck explaining why Bitcoin improves investor portfolio performance, with BTC’s low correlation to traditional assets cited as one of the main reasons.
Portfolios With Bitcoin Allocation Outperform Traditional Investments
Bitcoin (BTC) was the best performing asset of the decade according to a recent report by Cointelegraph and earlier this week Morgan Creek Capital CEO, Mark Yusko, said that every investment portfolio should have a minimum 1% Bitcoin allocation.
Yusko made the comments during an interview with Max Keiser on the Keiser Report, published on Jan. 30. Keiser also noted that portfolios with a 1% allocation to Bitcoin have also outperformed nearly all other investments of the past five years.
Over the past 6 years, due to its volatile nature, many investors have taken advantage of Bitcoin’s wide price movements. Hence, it has been suggested that a diversified crypto portfolio doesn’t offer the advantages that an investor could expect from the application of traditional diversification principles.
Bitcoin’s high volatility is often interpreted as an unreasonable risk to traditional investors and it has been one of the key issues preventing established investment firms from considering it as a consistent investment vehicle. However, volatility is one of the primary reasons Bitcoin is able to generate phenomenal gains to investors.
Nevertheless, we’ll look further into the matter and for those looking to take advantage of Bitcoin’s behavior without exposing themselves to the risk presented by its volatility we will analyze how several investment baskets composed of Bitcoin and traditional assets such as stock indices and treasuries perform.
Defining Diversified Investment Baskets
To determine whether diversified crypto portfolios provide a return that is above the average produced by traditional markets but also does not expose investors to untenable levels of risk, we have analyzed the diversification power of traditional stocks indexes (S&P 500 and Nasdaq Composite), and the Treasury Bill (10 Year Government Bond) in comparison to investing only in Bitcoin or in a Bitcoin-indexed trust like the Grayscale Bitcoin Trust (GBTC).
We defined the following investment baskets:
Basket Nº1: 50% of Bitcoin and S&P 500;
Basket Nº2: 50% of Bitcoin and Nasdaq;
Basket Nº3: 50% of Bitcoin and T-Bill;
Basket Nº4: 33% of each Index (S&P500 and Nasdaq) and 33% of Bitcoin;
Basket Nº5: 33% of Bitcoin, S&P500 and T-Bill;
Basket Nº6: 33% of Bitcoin, Nasdaq and T-Bill;
Basket Nº7: 25% of each asset (BTC, S&P500, Nasdaq and T-Bill).
Analyzing the period from Jan. 2017 until Dec. 2019, Bitcoin alone offered the best cumulative return (293%) from all the investment options. The asset was followed by a 270% gain from the Grayscale Bitcoin Trust.
From a risk-adjusted perspective, Bitcoin shows a 0.98 ratio and Grayscale a 0.67 Shape ratio – considered low values – meaning investors are taking up too much risk for the return they get from investing in these two assets.
These two assets will be used as the reference investment options when comparing the performance of the diversified investment baskets.
Diversification basket performance
Looking at the cumulative returns for each basket, we conclude that basket Nº2 (composed of 50% Bitcoin and 50% Nasdaq Composite) offers the best investment option (222%) for the sample period. This was followed by basket Nº1 which was composed of 50% Bitcoin and 50% S&P 500.
The third best option consists of investing 33% in each stock index (S&P 500 and Nasdaq Composite) and 33% in Bitcoin (basket Nº4), resulting in a 192% cumulative return. From a purely return-based point of view, all the diversified options give investors a worse performing strategy than investing solely in Bitcoin or Grayscale’s GBTC security.
Interestingly, the worst cumulative returns from the baskets is the one with more diversification (basket Nº7). This basked consisted of 25% of each asset (BTC, S&P500, Nasdaq and T-Bill) and provided a 164% return.
We could be tempted to reconfirm previous reports citing the lack of value in diversified crypto investing, but in order to reach that conclusion, one would need to analyze the risk-adjusted performance using the Sharpe ratio. This would allow an investor to comply with its risk aversion level.
The data shows that 5 out of the 7 available diversified baskets offer a better risk-adjusted performance than investing in either Bitcoin or Grayscale’s (GBTC) trust. Moreover, the best option is provided by basket Nº4 which has a 1.32 Sharpe ratio and consists of investing 33% in each index and the remaining 33% in Bitcoin. The options consisting of 50% Bitcoin and 50% of the other stock indexes offer also acceptable Sharpe ratios at 1.20 and 1.14.
Diversification Power For Investors
It is worthwhile mentioning that in order to develop this analysis, weekends and holiday returns were taken out of the sample in order to construct diversified portfolios as stock indexes are not traded during those days, unlike the cryptocurrency market which is always open.
Despite that adjustment, this analysis shows the benefits of applying traditional diversification principles into the crypto space.
Looking forward, investors have the chance to take advantage of high-gain assets like Bitcoin and offset their risk exposure by investing in traditional stock indexes to generate superior performance.
VanEck Report Illustrates Why Institutions Should Hold Bitcoin
A report published by investment management firm VanEck on Jan. 29 suggests that institutional investors should allocate a small percentage of their capital into Bitcoin (BTC). Per the report, “Bitcoin may enhance the risk and return reward profile of institutional investment portfolios.” The researchers also claim:
“A small allocation to Bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix while only minimally impacting its volatility.”
Obstacles To Institutional Adoption of Bitcoin
Among all the portfolios considered by VanEck, the one consistently showing the highest return was the one which had 3% in Bitcoin. Still, the report explains that Bitcoin’s nature as a bearer asset and lack of infrastructure linking it to capital markets is an obstacle to institutional adoption.
VanEck also claims that Bitcoin can potentially become digital gold given its scarcity, monetary value and ease of transfer. The researchers admit that Bitcoin is not a currency, but still has the potential to become one:
“Bitcoin is not quite a currency but most certainly is a money, however it may become a currency in the future.”
An in-depth comparison of the features of the United States dollar, gold and Bitcoin contained in the report also suggests that Bitcoin has more of the features that are desirable from an asset that serves as money than gold itself.
Many in the crypto community have high hopes for Bitcoin as an investment asset. As Cointelegraph reported earlier, founder and partner of crypto venture capital fund Morgan Creek Digital suggested that Bitcoin recently reaching $10,000 is just the first step in its way towards $100,000 by 2021.
CME’s Chief Economist Echoes Pomp’s Views On BTC As Hedge
Mainstream financial entities are beginning to see Bitcoin (BTC) as a non-correlated asset, a concept Morgan Creek Digital Co-founder Anthony Pompliano has been promoting for over a year.
“If Bitcoin is not likely to correlate to economic factors, or to traditional equities and fixed income securities, then Bitcoin could serve as a portfolio diversification tool,” said chief economist at the Chicago Mercantile Exchange Bluford Putnam said in a Feb. 11 video on Finbold.
Bitcoin’s Price Does Not Move In Stride With Traditional Markets
Since Bitcoin is a new kind of borderless and decentralized asset, it makes sense that it would not track the same price fluctuations seen in traditional markets, such as stocks and bonds. BTC has shown evidence for this lack of correlation several times in its history, including
Crypto expert Anthony Pompliano, or Pomp, as he is known on social media, has expressed this concept for years.
“The most important part of Bitcoin, when it comes to the global hedge, is the fact that it’s a non-correlated asset — meaning that, as stocks go up or down, Bitcoin doesn’t have correlation to that,” Pomp told Cointelegraph in an earlier interview.
Traditional Market Managers Are Just Catching On Now
Over the years, various people have knocked Bitcoin as a viable stable portfolio option due to the asset’s wild price fluctuations. In spite of Bitcoin’s volatile price action, however, Putnam said the coin’s lack of mainstream correlation might make it a valuable, albeit small, addition to portfolios.
“Since Bitcoin is highly volatile, only a very small allocation — say, 2% of the portfolio — might reduce risk if the lack of correlation holds,” Putnam said.
Putnam is referring to a typical hedge-type portfolio, which normally holds 60% stocks and 40% fixed income assets, such as bonds. Historically, this percentage allotment has proven itself stable in value during most economic situations.
According to 2019 experimentation, Putnam said adding 2% Bitcoin to the mix slightly reduced overall risk. Putnam explained:
“The portfolio for potential diversification also shows up in how Bitcoin prices might behave if geopolitical events destabilize traditional markets and created uncertainty.”
In August 2019, Pompliano forecast that Bitcoin would make its way into all institutional portfolios eventually.
CME declined to expand on Putnam’s comments for this article. Cointelegraph reached out to Pompliano for additional details but received no response as of press time. This article will be updated accordingly should a response come in.
Institutions Eye Bitcoin As Hedge Against Global Economic Volatility
The world has arguably been teetering on the brink of a recession for months now. But recent events could be pushing the global economy even closer to the precipice. The coronavirus outbreak has choked China’s output, leading to predictions that it will trigger a global slowdown. Europe is facing its own challenges amid ongoing Brexit uncertainty, economic contraction in Germany, and the continuing strikes in France.
So, it’s unsurprising that investor attention is turning to the asset classes that do not correlate with the stock markets. The price of gold saw an uptick in the first week of February, as did the price of Bitcoin (BTC), which rose above $10,000 for the first time this year.
Although Bitcoin’s price hike could be due to a whole variety of factors, one possible cause is the increasing use of digital currencies as a hedging instrument. Anthony Pompliano certainly thinks so, having told Cointelegraph recently that he believes there is increasing evidence to support this view.
Pompliano is right in that diversifying an investment portfolio is one of the most basic hedging techniques. It means an investor reduces their risk exposure should any one asset decrease in value. In this case, holding Bitcoin as an asset uncorrelated to the stock market could offset against losses in a share portfolio.
More sophisticated hedging tactics involve taking multiple positions against the same asset using instruments such as options. Let’s say an investor buys 1 BTC for $10,000. The same investor could then purchase options with a strike price of $9,000 for a premium of $200 each. In doing so, they’re hedging against losses above 10% for a fee of only 2%.
Really, Bitcoin As A Tool Against Volatility?
At first glance, the argument that traditional investors would turn to Bitcoin to hedge against volatility in the stock markets appears to be an odd one. It’s fair to say that Bitcoin’s volatility has dampened over recent years compared to what was observed before. But compare and contrast Bitcoin’s single-day drops with those on the stock market. During the last recession, the stock market underwent several single-day drops of around 5% to 7% between 2008 and 2011, but even in 2019, Bitcoin saw price drops nearly twice as steep in a matter of hours.
Furthermore, the price of cryptocurrencies is vulnerable to market forces that are less predictable than the traditional markets. For example, the most recent price pump from the start of February could be pinned down to nothing more than whales placing spoof orders, the kind of event that no amount of technical analysis could predict.
On the other hand, an increasingly diverse range of crypto derivatives provides ample opportunities to hedge on the price of BTC and other digital assets. When the Chicago Mercantile Exchange launched its first regulated options product in January, which became an immediate hit, illustrating that there is a clear appetite among institutions for new types of hedging instruments.
The crypto-derivatives trend isn’t just limited to institutions either. The retail markets for cryptocurrency derivatives have been booming. Last year, crypto exchange Binance opened up its derivatives markets, and others such as OKEx expanded their offerings. Furthermore, BitMEX posted a record trading day in June as the price of BTC hit its 2019 high, further reinforcing the argument that traders are eager for more ways to hedge.
Overall, despite the volatility inherent in cryptocurrencies, the arguments for it being used as a hedging instrument appear to stack up. The Financial Times even cites crypto as one factor threatening the gold markets.
However, not everyone agrees that using crypto as a hedging tool is a good idea, given its unpredictable behavior. Speaking to Cointelegraph, Alon Rajic, managing director of Money Transfer Comparison, said he does not believe crypto should be used to hedge risks:
“There hasn’t been enough time to test Bitcoin in different scenarios. Before 2017, most people haven’t even heard about it. So far, we’ve seen it rise and fall in times of succession and growth for the global economy, but have yet to see how it behaves in recession.”
Hedging Opportunities In DeFi And Beyond
The fast-growing DeFi and broader retail crypto finance sector now offers many hedging opportunities. At the most basic level, Ethereum users can hedge against price drops by locking their ETH into one of Maker’s collateralized debt positions to generate DAI. However, lending out the DAI on one of the many platforms that are now available also generates interest of up to 10%, further protecting against losses and offering the opportunity for passive income.
Anthony Pompliano Continues Push For Pension Fund Crypto Allocation
Morgan Creek’s Anthony Pompliano presses pension funds to allocate 1-5% of their portfolios to Bitcoin.
As pension funds struggle with their funding, Morgan Creek Digital co-founder Anthony Pompliano continues to press them into adding more Bitcoin into their portfolios.
In a letter to investors, Pompliano said pension funds like the California Public Employees’ Retirement System (CalPERS) will do well to invest in Bitcoin instead of increasing their allocations of illiquid assets. “It is as clear as possible — adding an allocation to Bitcoin would increase the risk-adjusted returns for a public pension fund,” said Pompliano.
He Suggests Pension Funds Allocate Between 1-5% Of Their Portfolios In Bitcoin. He Added:
“And you want to know where the greatest innovation is occurring at the moment? Bitcoin. There is a group of individuals who have built a $150+ billion asset with the goal of assuming the position of the next global reserve currency. If that happens, it will be the best performing asset for the next 20+ years. But even if that doesn’t happen, things will be okay.”
Morgan Creek has long pushed for more pension funds to take at least 1% allocation in Bitcoin. CEO Mark Yusko said in January that if foundations had a 1% allocation five years ago, they would’ve made 9.2% in alpha–or the performance of a portfolio relative to a benchmark–than the 7.2% they actually made in that time period. So far, there are two pension funds from Virginia that invested in Morgan Creek.
Morgan Creek is not the only industry player seeing the potential for crypto’s growth within the pension world. Avanti Bank founder and CEO Caitlin Long told Cointelegraph in April that the crypto and blockchain industries need to prove they are solvent to big pension funds like CalPERS.
Billionaire Says An Exponential BTC Price Increase Would Be A Disaster
Chamath Palihapitiya says Bitcoin is uncorrelated to financial markets, which is one reason people should invest 1% of their wealth in it.
Chamath Palihapitiya, the billionaire CEO of Social Capital and Virgin Galactic Chairman, has called Bitcoin a type of disaster insurance against governments making bad financial decisions.
In an interview with Unchained Podcast on June 23, Palihapitiya said hard-working people need something like Bitcoin as insurance, as the cryptocurrency is “really fundamentally uncorrelated” to the consequences of legislators behaving badly.
However, the CEO pointed out that for the Bitcoin price to skyrocket at this point, things would have to go terribly wrong in the financial system, with disastrous impacts on your friends and family.
“If your Bitcoin bet pays off,” Palihapitiya said, “it will be cataclysmically destructive for the world. And that’ll have enormous consequences to many people we all know and care about who weren’t hedged in Bitcoin. And so you almost don’t want it to happen.”
Enough Insurance To ‘Make You Whole’
Palihapitiya himself invested in 2010, by buying one million Bitcoin for $80, whose value reached the billions when the token had its all-time high in December 2017.
No wonder the billionaire claims that Bitcoin (BTC), unlike “second- and third-tier” cryptocurrencies like Ethereum (ETH), is one of the few ways to get a “massive asymmetric payoff” from such a small investment.
“You want to be sure that a small amount of insurance can basically make you whole,” Palihapitiya said, citing a $1,000 payoff for a $1 investment as a good example. “That’s why I just think that, you know, you should take 1% of your portfolio, put it in Bitcoin.”
“At the end of the day, any other asset class — equities, debt, real estate, commodities — they’re all tightly, tightly coupled to a legislative framework and an interconnectedness in the financial markets that brings together many of the governments that are sort of behaving this way.”
The billionaire has also speculated the value of Bitcoin in the future could reach millions of dollars, or drop to zero.
As Central Banks Print $1.4B An Hour, Bitcoiners Bet On Federal Reserve ‘Capture’
$1.4 billion every hour.
According to Bank of America, that’s the pace at which central banks around the world have been buying assets since the coronavirus-related lockdowns started in March. Coincidentally or not, the market value of the Nasdaq 100 gauge of tech stocks has climbed at roughly the same pace since then.
It’s the kind of comparison one might expect from a bitcoin true believer, steeped in the view that central-bank money printing is debasing the U.S. dollar – sure to bring rampant inflation. But it’s almost jarring when the observations instead come from researchers at a Wall Street bank at the center of the traditional financial system and dollar-based economy.
“For much of the past 10 years, Wall Street has proved too big to fail, and monetary policy markets have implicitly supported asset prices to boost economic growth,” Bank of America Chief Investment Strategist Michael Hartnett wrote earlier this month in a report. “In 2020 the policy is more explicitly engineering an overshoot in asset prices.”
That’s the backdrop for the Federal Reserve’s two-day, closed-door meeting this week, where top U.S. officials will evaluate what is perhaps the loosest monetary-policy stance in the central bank’s 107-year history.
Interest rates have already been cut close to zero, and the Federal Reserve is buying $80 billion of U.S. Treasurys a month to keep markets afloat, with trillions of dollars more available through emergency-lending programs.
The Fed isn’t expected to announce any major changes other than perhaps formalizing a plan that Chair Jerome Powell laid out last month, under which inflation would be allowed to rise above the 2% annual target without triggering immediate rate hikes. The central bank’s balance sheet already has expanded this year by about $3 trillion to $7.1 trillion as of last week.
One possibility is that the Fed will hold off announcements of new stimulus until markets take a fresh nosedive. Despite the U.S. unemployment rate more than doubling this year to 8.4%, the Standard & Poor’s 500 Index of large U.S. stocks is still up 3.4% on the year, and speculation is growing that the Fed might be unwilling to let stocks fall.
“The market has just become too reliant on the Fed being there,” Brian Coulton, chief economist for the sovereign group at the bond-rating firm Fitch, said last week in a phone interview.
Consumer sentiment has dipped in the past few months, but it’s nowhere near as low as it was after the 2008 financial crisis. Most economists say the current crisis is much worse.
Imagine how consumers might rein in spending if the stock market tumbled 23%, as it did in the final quarter of 2008. In economics, there’s a psychological concept known as the “wealth effect,” where consumers spend more if the value of their assets rise, even if their income doesn’t change. The reverse is also true.
Steve Blitz, chief U.S. economist at the forecasting firm T.S. Lombard, says it’s a “term of art” trying to gauge how far stocks might have to fall before the Fed would step in.
“They’re not going to step in front of this normal volatility,” Blitz said. “They’ll get involved when they think it’s a move in the equity market that threatens the outlook.”
Bitcoin traders might try to frame the question in billions of dollars per hour.
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