One of the most enduring cryptocurrency stories revolves around seeking the definition of crypto as an asset class. Is Bitcoin (BTC) more of a digital currency or digital gold? Do its unique properties warrant seeing it as completely different from the established classes of financial instruments? A recently published report from JPMorgan Chase strategists has sparked another round of such debates.
The conclusions presented by the report are at odds with the “Bitcoin as a safe haven” tropic that has become somewhat conventional wisdom of late. The authors argue that the original cryptocurrency is actually not that big of a hedge in a situation where markets are under severe stress and that the expansion of retail ownership makes it look more like a cyclical asset that along with the stock market is moves up and down.
It is reasonable to discuss the JPMorgan analysts’ argument with financially savvy commentators to assess its strength, as well as to weigh what recent developments in crypto markets can tell the general public about the nature of digital assets as a class.
A different kind of hedge
A good hedge asset must withstand the forces that can reduce the value of most other assets in an investor’s portfolio. JPMorgan’s strategists’ case against BTC’s hedging capacity appears to rely heavily on observations from the past year, when both crypto and traditional markets plummeted in March due to the COVID-19 scare, only to climb to their respective record highs shortly thereafter.
The argument presented in the report also contains many assumptions. It assumes a very specific definition of a hedge asset that only takes into account a limited number of risks against which it is protected. Furthermore, it implies that cryptocurrencies behave more or less uniformly under different market conditions.
Brock Pierce, chairman of the Bitcoin Foundation, commented to Cointelegraph that Bitcoin’s behavior as a mature asset does not necessarily follow a rigid pattern in all situations: “I agree with them in a sense that it is not a ‘hedge asset’ because it has become what it can be. ”He added:
“At times in many countries around the world it was a great shield against inflation. Sometimes where there is general ‘risk-on’ or ‘risk-off’ in the markets – stock markets and bond markets – we see that Bitcoin can follow that – because it is the most ‘liquid’ asset for many people. ”
Amber Ghaddar, founder of decentralized capital market AllianceBlock, who previously held senior positions at JPMorgan, told Cointelegraph that “ as a pure hedging asset and on shorter intra-month and intra-quarter timeframes, Bitcoin has been a bad hedge against acute market stress. compared to the USD, CHF and JPY. Therefore, she agrees with JPMorgan’s assessment: “This is because Bitcoin lacks the short base that sponsors the strength of the USD during market shocks.”
Ghaddar added, however, that this is not synonymous with the fact that BTC cannot serve as a hedge against events such as a destabilizing rise in inflation or a policy shock. For her, Bitcoin can best be described as:
“High volatility, high return investments that are driven by their peculiar characteristics and that provide portfolio diversification rather than a purely hedging tool in a portfolio.”
Another point to note is that during the market collapse in March 2020 due to a black swan, a pandemic, almost all cash was strongly correlated in their simultaneous decline. So this does not necessarily mean that Bitcoin and stocks should show a similar relationship across the board, for example between the S&P 500 and the price of BTC.
Seamus Donoghue, vice president for sales and business development at digital asset infrastructure provider Metaco, told Cointelegraph that in the wake of acute liquidity events, such as the March 2020 stock market crash, correlations for all assets are tending to 100% and all types. of assets are sold to increase liquidity. In addition, he wondered how the report only takes into account certain risks and not others:
“The authors appear to merge hedging acute liquidity events, which is always about moving all assets to cash, and hedging risks such as monetary and fiscal mismanagement. It is important to distinguish between short-term liquidity effects on assets and fundamental attributes and properties of hard assets such as gold and Bitcoin. “
Konstantin Richter, CEO and founder of blockchain firm Blockdaemon, commented to Cointelegraph that aside from the largely exogenous shock of the spring 2020 pandemic, there weren’t really any conflicting conditions in the economy that would really test crypto against other assets as a store of value hedge. Richter believes that once such a test is implemented, digital assets will outperform any competition.
Still not cyclical?
As to whether Bitcoin is going to be like discretionary stocks that do well when the overall economy is thriving, those who shared their thoughts with Cointelegraph remained largely unconvinced. Ghaddar does not agree that “retail adoption increases correlation with cyclical assets”. In fact, she believes it works the other way around: “Most retail investors prefer HODL (buy-and-hold) Bitcoin. The same is not true of new institutional and speculative money recently deposited in Bitcoin. “
Ghaddar also noted that the correlations observed by the report’s authors could simply be an artifact of a measurement tool they were using. When applying the Spearman correlation coefficient in place of the commonly used Pearson coefficient, Ghaddar’s team didn’t see crypto asset prices vary significantly with other asset classes.
Some even called into question JPMorgan’s motivation for drawing the report’s conclusions amid the JPM currency’s rollout. Louisa Murray, vice president and head of sales at the banking platform Railsbank, commented:
“It can be assumed that that is where their interests lie. When we reject Bitcoin as a cyclical asset, we forget the fundamental principle why Bitcoin exists – namely, as an alternative electronic payment system to the financial institutions acting as the ‘trusted’ third party in financial transactions. However, it is these third parties that add extra costs to traditional financial transactions that Bitcoin tries to solve. “
The Distinctive Features of Crypto Assets
What is ultimately left with the properties of crypto as an asset class? Pierce thinks Bitcoin’s status as a financial instrument is still much fluid, as he noted, “What we’ve learned over the past year about the nature of Bitcoin as an asset: what it is, and what it can be, and how it will be able to influence people’s portfolios and investment decisions evolve at a rapid pace. “
There are also unique features that one can locate with confidence. The main benefits of Bitcoin are faster settlement and wider global exposure compared to other assets in the traditional financial market. Ultimately, cryptocurrencies now have the opportunity to develop important features – such as means of payment – and not just as an investment tool. In the long run, this can untangle them from traditional financial assets.
Additionally, Murray expects crypto to become more regulated and accessible, which would reduce market volatility. With the younger generations investing their money in a different way, Murray expects that “new cyclical patterns will emerge in the future, possibly with markets following crypto, and not the other way around.”