A recent report by Grayscale, “Hedging Global Liquidity Risk with Bitcoin,” compared how recent global events impacted traditional assets, as well as Bitcoin markets. Further, the report spoke about how Bitcoin can act as a hedge against liquidity risks that arise out of such events around the world.
The aforementioned events include political and other financial crises around the world, and how they could affect the price of commodities or assets etc. According to the Grayscale report, Bitcoin was immune to such events as,
“… it [Bitcoin] has a distinct set of properties, unlike any other asset. Through this unique mix of properties, Bitcoin has the potential to perform well over the course of normal economic cycles as well as liquidity crises, especially those involving currency devaluations.”
Since Bitcoin is a better store-of-value than gold in many ways, it is linked to almost all major currencies around the world and represents a transparent, immutable, and global form of liquidity that can provide both wealth preservation and growth opportunities. It [Bitcoin] can act as a hedge against these liquidity risks.
Grayscale defined these risks as,
“Liquidity risk is the risk of a real decline in wealth resulting from an imbalance in the amount of money and credit relative to debt in a given economy and how exposed an investor’s portfolio is to that imbalance.”
Some of the events that have caused instability in traditional assets include,
During this crisis, the Greek government decided to close state banks and to impose strict capital controls on transactions. These restrictions remained in place for three weeks, while bailout terms were negotiated with international creditors. According to Grayscale, Bitcoin was a top performer and produced a return of 28% versus an average of just -1.7% for the twenty other markets and currencies including GBP, EUR, CHF, etc, during this period.
Economic Concerns in China
On August 10, 2015, the PBoC announced a significant change to its monetary policy amid local stock market turbulence and concerns over the health of the world’s second largest single-country economy. To stimulate export-driven growth, Chinese policymakers lowered the RMB-USD reference rate by 1.9% and signaled the transition to a more “market-driven” pricing regime. This was followed by RMB’s largest single-day drop in over twenty years, with investors repricing risk through a five-month sell-off of global risk assets in favor of wealth preservation assets.
Naturally, Bitcoin largely outperformed major market currencies and markets like JPY, RMB, S&P 500, CAD, etc, producing a cumulative return of 53.6% versus an average return of -10.1% across the rest.
Similar positive growth in Bitcoin’s price was seen during other crises like Brexit, Tighter US Financial Conditions, and perhaps the most recent crisis, the U.S.-China trade war. In all the aforementioned crises, Bitcoin managed to outperform traditional assets.
The report concludes that,
“While it is still very early in Bitcoin’s life cycle as an investable asset, we have identified evidence supporting the notion that it can serve as a hedge in a global liquidity crisis, particularly those that result in subsequent currency devaluations… We will continue to analyze Bitcoin market action to deliver investment insights as we learn more from our experience with this exciting new asset.”
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