The management at Grayscale Investments, a New York-based financial services firm focused on providing asset management solutions for cryptocurrencies, has published a report which shows that bitcoin (BTC) could potentially be used as a hedge against global liquidity crises.
Grayscale’s report notes that bitcoin, the world’s most dominant cryptocurrency, may be used to enter a strategic position - as part of a long-term investment portfolio. This, as bitcoin has key characteristics which would allow it to effectively serve as a hedge against global economic uncertainty. These unique characteristics include transparency and the immutable nature of the decentralized Bitcoin ledger, Grayscale’s report mentions.
Bitcoin As A Hedge Against Underperforming Traditional Investments
As detailed by Grayscale’s researchers, bitcoin may act as a hedge against underperforming traditional investments and a certain (percentage) allocation of the pseudonymous cryptocurrency in a portfolio could also potentially increase the overall return on investment (ROI).
Grayscale’s report further mentions that changes in global monetary, trade, and fiscal policies has made it quite challenging for government officials to manage their economies. Due to these issues, individual investors must take greater control of their investments and assume responsibility for ensuring their financial wellbeing.
Cryptoassets Outperform Traditional Financial Assets After Macroeconomic Shocks
Five different macroeconomic shocks were examined carefully in Grayscale’s report, in order to analyze how cryptoassets were able to outperform traditional investments during periods of political and economic uncertainty. Notably, the report’s authors studied the long-term effects of several global events including Brexit, Grexit, structural devaluation of the Chinese yuan (CNY), and two of the most impactful economic shocks - which have been attributed to actions taken by the Trump administration.
As confirmed in Grayscale’s report, a certain allocation of bitcoin in an investment portfolio could serve as a hedge from the potential devaluation of traditional financial assets - due to various macroeconomic shocks (including those listed above).
Grayscale’s study also found that bitcoin’s price increased significantly while world governments attempted to address problems related to Grexit (an abbreviation for "Greek exit" that is commonly used to refer to Greece's potential withdrawal from the eurozone).
Bitcoin Price Surges During "Liquidity Freeze" Due to Grexit-related Events
As noted in Grayscale’s report, “during the liquidity freeze [due to tensions and various events in Greece], 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.”
After the resolution of the Grexit crisis in July 2015, Bitcoin’s value appreciated by 28% against an average of around -1.7% for 20 other traditional financial markets and major fiat currencies.
Moreover, Bitcoin performed quite well following the structural devaluation of the Renminbi due to policy changes introduced by the Chinese government between August 2015 and December 2016. As mentioned in Grayscale’s report:
Between the day of the announcement and the trough of the drawdown, Bitcoin largely outperformed the following major markets and currencies, producing a cumulative return of 53.6 percent versus an average return of -10.1 percent.