Bitcoin Is Hedge Against Global Liquidity Crises: Grayscale Study

Grayscale Investments, the cryptocurrency asset manager backed by Digital Currency Group, which acquired CoinDesk in 2016 – has released a report showing what it argues is bitcoin’s potential as a hedge against global liquidity crises.

Overall, the authors suggest bitcoin ought to be considered a strategic position within long-term investment portfolios considering its transparent, immutable and global liquidity. Bitcoin has a distinct set of properties unlike any other asset, the paper says, which allow it to perform well over the course of normal economic cycles as well as market disruptions.

Additionally, noting significant shifts taking place in monetary, fiscal and trade policies around the world, Grayscale alleges politicians and policymakers may find it increasingly difficult to manage their economies – thus insinuating a need for investors to take control of their own finances.

The report examined five recent macroeconomic shocks in which the digital asset outperformed other investments as a store of value. The authors extrapolated from these case studies – including Grexit, Brexit, China’s structural devaluation of the renminbi and two Trump shocks – that bitcoin could be a useful tool in helping investors insulate their portfolios from any potential market failures.

Below are three exegesis of bitcoin’s inherent ability to hedge against liquidity crises.

In the first case study, 'Grexit and the 3-week Greek bank shutdown,' which spanned from April to July 2015, Greece underwent a physical liquidity crisis as default of sovereign debt seemed inevitable.

In a response to financial uncertainty, the Greek government closed state banks and imposed strict capital controls on transactions, beginning on June 28, 2015.

These restrictions remained in place for three weeks, while bailout terms were negotiated with international creditors, which sparked apprehensions about the unchecked power of governments over holders of centralized assets in times of crisis.

Yet, “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,” write Grayscale analysts.

Leading up to the resolution to the Grexit crisis on July 13, 2015, bitcoin saw returns of 28 percent versus an average of -1.7 percent for 20 other markets and currencies.

Another case study examined the People’s Bank of China’s structural devaluation of the renminbi, and China’s shift in monetary policy between August 2015 and December 2016.

Amid stock market turbulence and concerns over the health of the world’s second largest economy, the Chinese government lowered the RMB-USD reference rate 1.9 percent, signaling a shift to “market-driven” pricing and an attempt to stimulate export driven growth.

This policy-shift saw RMB’s largest single day drop in over twenty years, as well as a five-month selloff of global risk assets in favor of wealth preservation assets, according to researchers.

Again, Grayscale notes bitcoin fared much better.

Bitcoin was used to hedge against Chinese liquidity risk, caused by local investors sold their assets against a structural currency devaluation.

The shock of the U.K.’s referendum vote to separate from the European Union was followed by a knee-jerk selloff and immediate decline in the pound sterling (GBP) and euro, as the market attempted to digest whether Brexit would portend the disintegration of the European Union.

During the first one-day global selloff, the researchers found, “bitcoin was a top performing asset, boasting a return of 7.1 percent on strong volume, versus an average of -2.1 percent for the rest of the group” of currencies.

Additionally, the researchers find cause to recommend, because the details of the transition plan still being worked out, global investors might consider allocating a portion of their investable assets to bitcoin to hedge against contagion stemming from the Eurozone, the world’s second largest economy.

Michael Sonnenshein image via CoinDesk archives