Digital Currency Revolution Series: A Perspective of Bitcoin as Hedging Vehicle for Global Turmoil

Of late, Bitcoin price has been under huge volatility and early this week, BTC fell below psychological support below $10,000 and declined near the $9,467 region on the back of some negative news, such as US SEC postponing BTC ETFs decision. According to some price and volume analysis, it could suffer a deeper drop.

However, BTC derivatives trading is getting popularity as it enables traders for price discovery and to derive yields by accurately anticipating if BTC will either increase or decrease in value.

In conjunction with that, for safe-haven sentiment, one could actually expect other traditional safe-haven asset classes such as gold, JPY or CHF – trios seem to be struggling for their stability quite often in the recent past. As a result, amid global slowdown that is looming across many financial markets, the investor class in the dynamic finance arena is ultimately cognizant about Bitcoin and other crypto peers in the same light as a potential safe haven role during the economic crisis, contemplating the very essence/need for the invention of cryptocurrency during 2008. 

To substantiate that stance, Mark Yusko, the CEO of Morgan Creek Capital perceived Bitcoin (BTC) a “chaos hedge, or schmuck insurance,” in an interview with CNBC Fast Money on Aug. 14th. Yusko added some commentary describing that needless to be apprehensive much about the short-term price actions of Bitcoin.

He further suggested that investors have to consider the long-term trends, emphasizing that it’s better to own a piece of the network. Yusko advised contemplating its predominant role as a counterweight to conventional financial markets, one has to have 1-5% of their net worth in this asset as an effective hedging vehicle, against all the potential issues that we foresee in the fiat currencies and the other turbulent asset classes like equity markets.

Another significant factor in the recent bullish price run of bitcoin may be increasing demand for Bitcoin as a hedge against macroeconomic uncertainty.

To better understand Bitcoin’s potential role as a hedge against liquidity risk, we run you through the cryptocurrency market functions and the industry developments in the prism of quite a few macroeconomic developments.

The mounting geopolitical risk and tighter financial conditions in the US leading to global growth concerns and weakness in the currencies of major US trading partners. (September – December 2016).

Escalation of US and China trade tensions posing systemic risks to global economic growth and placing further pressure on the RMB.

After a horrible bearish rout in 2018, the stunning turnaround thing is that the rapid spike in the value of Bitcoin price comes amid the severe financial crisis in the global markets, as the United States and China continue their hostile trade war. 

The slowdown in the global financial markets had been a persisting thing since 2018 owing to the geopolitical turmoil, be it trade tension between the United States and China, NAFTA negotiations, Brexit, the recent developments in this economic crisis has just worsened the circumstances.