Strong Evidence Supports “Bitcoin Can Serve As A Hedge In A Global Liquidity Crisis”: Grayscale Report

Can Bitcoin serve as a hedge in a global liquidity crisis? According to Grayscale Investments’ latest report titled, “Hedging Global Liquidity Risk with Bitcoin,” Yes.

Exploring Bitcoin’s potential role as a hedge against liquidity risk, the report states, financial crises are becoming more common and global and now more than ten years into a bull market for risk assets, it is imperative to understand the different available options.

A New Way To Hedge

Liquidity risk is a real decline in wealth that can result in inflation or deflation. In the macroeconomic order, liquidity is controlled by central banks and federal governments.

The report argues that traditional portfolios lack adequate diversification to protect against liquidity risk when despite muted volatility across global markets, the looming risk of a liquidity crisis is high.

Bitcoin’s unique mix of properties that involves store of value, spending and growth gives it potential to perform well over the course of normal economic cycles as well as liquid crises, “especially those involving currency devaluations.

Grexit (April – July 2015)

To validate this point, Grayscale provides five macroeconomic development as examples, starting with Grexit from April to July 2013. Greek’s exit from the European Monetary Union had the world questioning the new government's ability that saw the Greek govt. closing state banks and imposing strict capital controls on transactions.

“During the liquidity freeze, Bitcoin emerged as one of the only means by which to transfer value in or out of Greece, reinforcing this new asset’s ability to return the power of control to the individual who holds it.”

At the time, Bitcoin was a top performer with 28% returns versus negative 1.7% for the twenty other markets and currencies.

Economic Concerns in China (August 2015 – December 2016)

In August 2015, the PBoC lowered RMB-USD reference rate by 1.9%. Following the largest RMB’ single-day drop in over twenty years, the market had a five-month selloff of global risk assets.

Yet again saw Bitcoin largely outperforming major markets and currencies with a 53.6% return versus negative 10.1% average return across the rest.

Brexit (June – December 2016)

On the day of Brexit announcement, June 24, 2016, the market witnessed a broad-based selloff across both risk assets and fiat currencies. During the knee-jerk, one-day global selloff, Bitcoin was the top performing asset with a 7.1% return on strong volume, versus an average of -2.1% for the rest of the group.

“Once again, we watched Bitcoin outperform other perceived safe-haven assets including gold, the Japanese yen (JPY), and global bonds.”

Rising Geopolitical Risk & Tighter US Financial Conditions (September – December 2016)

During 2016 USD presidential election, tighter financial conditions and rising geopolitical risk drove a multi-month selloff in risk assets while US Dollar climbed multi-year highs. From the beginning of the drawdown, Bitcoin topped the performance charts with 17.2% of cumulative return versus an average of -3.5% in other markets and currencies.

US-China Trade Tensions Escalate (May 5, 2019 – ?)

The most recent and fresh one is the trade tension between the US and China that is in its early stages and saw Bitcoin registering returns of 47% versus negative 2% for others.

A significant shift in monetary, fiscal, and trade policies is taking place around the world that will likely to impact the global markets. During those times, Bitcoin could be a “useful tool in helping investors insulate their portfolios from any failure to manage these problems effectively.”

The report concludes that though bitcoin is still very early in its life cycle, as mentioned above there are identified evidence suggesting that bitcoin can, in fact, serve as a hedge in a global liquidity crisis and play a “pivotal role” in creating more efficient portfolios.

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