Crypto Perspective 2: Risk Asset?
Implicit in the question “Is Crypto a safe haven?” is another question: “Is Crypto a risk asset?”
Of course, how one answers the first will determine their answer to the second, at least when thinking about the question from a simple either/or standpoint.
Does it have to be either/or?
2. Is it a risk asset?
As explained in part 1, Crypto can be seen as a safe haven asset even with its heart stopping levels of volatility.
It simply depends on what one is seeking a haven from.
That being said, an important aspect of safe haven assets is their ability, or at the very least their perceived ability, to retain their value.
This makes intuitive sense, since an asset that could lose all its value can hardly be considered to be “safe” – investing capital into an asset for the express purpose of not losing that capital becomes a pointless exercise if so.
Which puts Cryptocurrencies in a strange position. On one hand, they provide an alternative to fiat currencies, but on the other, their levels of volatility puts the capital invested in them at risk.
For those who truly see Crypto as a refuge from the fiat system, the volatility isn’t much of an issue. This is because their alternative is a safe haven denominated in fiat, which in their minds is going to zero anyway (gold is a notable exception).
Of course, implicit in this rationale is that Crypto isn’t going to zero, which is what helps them ride through the volatility. However, from the standpoint of someone who does not share that same opinion or belief, i.e non-true believers, Crypto’s volatility precludes it from being a safe haven.
It is important to note that volatility tends to be a cyclical phenomenon across asset classes. As the Cryptocurrency market matures, we might well see levels of volatility come down from current levels, at least for the more established Cryptos.
Furthermore, during times of crisis, even the most stable of assets can experience extreme volatility. US Treasuries, for instance, experienced high levels of volatility when Covid shutdowns first swept across the world in March 2020.
This was due to a severe drop in liquidity as everyone hoarded their “safe haven” USTs, leading to one of the most liquid financial markets in the world seizing up.
Which raises an important question: does this mean USTs cannot be considered a safe haven? Clearly not, since many folks wanted and needed to get their hands on them, but no one was willing to sell.
Consequently, viewing an asset’s suitability as a safe haven is not as simple as just looking at how volatile it is – one has to understand the systems that underpin the asset, and how they are structured.
If, after gaining a thorough understanding of these systems, structures, and paradigms, an individual concludes that an asset’s volatility does not preclude it from protecting against larger systemic risk; then why can’t a safe haven also be a volatile risk asset?
To be continued…
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