Stop treating Bitcoin as risky. It’s a safer asset than most – CoinDesk – CoinDesk

Jill Carlson, columnist at CoinDesk, is co-founder of the Open Money Initiative, a non-profit research organization working to secure the right to a free and open financial system. It also invests in start-up startups with Slow Ventures.

People think I got into bitcoin because I have a high risk tolerance.

In fact, I came in because my risk tolerance is low for the worst scenarios.

Bitcoin is often presented as a risky bet. It’s nascent. It has only existed for ten years. It is misunderstood by mass markets. It’s an experience. It could still fail. All of these statements are true. In many ways, the risk profile of bitcoin resembles that of an early start. Bitcoin seems to hover between the depths of disillusionment and the slope of enlightenment. This means that most people continue to view cryptocurrency as some sort of fool. It’s a gamble.

These dynamics mean that investors often view bitcoin as a risky asset. It is placed in the same category as high growth stocks, high yield debt, high beta ETFs, venture capital investments and emerging markets.

The markets generally have two modes: with or without risk. In risk scenarios, when markets are confident and things are going up, risky assets tend to outperform safe havens. When markets are at risk, safe havens like gold, treasury bills and cash fare better, and are often the only investments that trade more as investors sell their riskier positions.

Whether a financial product is a risky asset or a safe haven depends on a number of properties. In some cases, it depends on the fundamentals of the asset. The share price reflects the company’s projected future cash flows, which in turn depend on dynamics such as customer demand. Dynamics can make companies more or less subject to market movements. In other cases, the categorization of a given asset may depend on the dynamics of supply and demand. Gold, with its relatively fixed supply and constant demand from entities such as central banks, withstands market cycles and downward shocks. In any case, however, I would say that what matters most to understand the correlations and behaviors of assets is the perception of the market. Do traders and investors see the asset as a good place to retreat to volatile markets? Or do market participants see investment as vulnerable to downside, but are they also ready to participate in expansion cycles?

Markets certainly still seem to view bitcoin as the latter. And when it comes to the price of bitcoin, and when it comes to market correlations, that perception is all that matters.

This perception lacks the most important properties of bitcoin. Bitcoin is, in many ways, the ultimate safe haven asset. It can be self-reliant, so even when trust systems and the rule of law fail, it can be preserved. It is open and borderless, with relatively liquid markets in all countries of the world. It resists censorship, which means that no government or institution can practically prevent bitcoin investment or transactions. Bitcoin has a fixed supply, much like gold. Bitcoin is digital, which makes it convenient for hoarding, holding and transporting. For apocalyptic preparers, dystopian sci-fi fans and apocalypse predictors, there is a lot to like about bitcoin.

However, if we look at the behavior of the price of bitcoin in the past two weeks, as concerns about a global pandemic have intensified, it is clear that bitcoin continues to behave more as a high risk investment than as the safe haven it promises to be.

Are the markets wrong? Should bitcoin be more correlated with gold than with Apple stocks? May be. But as John Maynard Keynes said, “markets can stay irrational longer than you can stay solvent.” The road to bitcoin being understood and considered a haven of peace is a long one, requiring a deep investment in education. What matters is the story around the asset, and right now the story around bitcoin is that it is a high risk gamble at an early stage. As far as the markets are concerned, this perception is a reality.