Crypto Perspective 1: Safe Haven Asset?
A major cognitive hurdle modern humans face is our strong predisposition towards categorization.
There are undoubted benefits to doing so, not least of which is that it aids in our evolutionary survival (Big teeth + Big claws = Category: DANGER!), but there are huge drawbacks as well, especially when it comes to dealing with innovation and new creations.
Cryptocurrencies provide an excellent example.
One of the (many) issues that Cryptocurrencies and their enthusiasts face in trying to bring the new technology mainstream is that the mainstream can only view Crypto in, well, a mainstream way.
A classic example of this is how Crypto is thought of in mainstream finance terms.
- Is it a “safe haven” asset?
- Is it a risk asset?
- Is it an asset that hedges against inflation?
- Is it a non-correlated asset?
- Is it a currency?
These questions all stem from the same source – the need to categorize; and not just out of habit or mechanical practice. It is the need to categorize in order to understand.
Put in another, very uncharitable way, mainstream folks cannot understand Crypto without first categorizing it into something familiar.
This can be generalized to: humans have great difficulty in understanding new concepts or inventions without first categorizing them, and therefore have to benchmark them against something that is already familiar.
But, is Crypto any of those things listed above? Unfortunately for people who can only think in terms of categories, the answer is ambiguous and quite possibly one that will infuriate them – it depends.
1. Is it a “safe haven” asset?
This truly is a matter of perspective, the question really should be – safe haven from what? Firstly, from a more general perspective, for those who consider very high levels of volatility the antithesis of what a safe haven asset is, and there are many who do, then Cryptocurrencies are not a safe haven.
However, for others who consider fiat currencies to be inherently self-destructive of their own value, and there are also many who do, then Cryptos can be a safe haven from fiat.
Interestingly, this point of view is also relevant to the traditional financial markets understanding of what a safe haven is. Conventional thinking views sovereign bonds as safe havens, especially those of major developed economies like Japan, Germany and the US.
Which is why every time there is a sell off in what the media deems to be “risk”, or “risky” assets, headlines will always include some reference to “strong buying in safe havens”, or “safe havens rallied in response”. They basically mean that the sell off was accompanied by strong buying in government debt, especially in US Treasuries.
Mainstream rationale is that these countries have large economies, are stable, and more importantly, can always tax their citizens more in order to pay off outstanding debt. Which is, if you think about it, an indirect way of saying that they do not believe that these countries will default on their borrowings.
But, that does not mean the probability of default is zero. The presence of fiscal hawks, and concern over high levels of borrowing in these countries clearly demonstrate this. (In Germany, the idea of borrowing is a debate in itself)
The more these countries borrow, the larger the specter of possible default will loom, and with default, or even a perception of possible default, comes massive currency devaluation.
Which is where Crypto-as-a-safe-haven comes in.
Bitcoin cannot default. Other “pure play” Cryptos (those that are built to be currency-like, excluding stable coins) are the same. They cannot default because the blockchain is not an entity that has creditors.
From this point in the thought process, if one is already a believer in Crypto, thinking of Cryptocurrencies as safe havens is only a small step away, volatility or no volatility.
To be continued…
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