Why Bitcoin is Not A Hedge

Well, it’s happened, the adoption of Bitcoin to the point where it has become mainstream enough. The problem is that the vision that Satoshi had for the digital currency has failed. Bitcoin is not the border-less currency that was envisioned, a decentralized system that would be separated from the pitfalls and difficulties that traditional currencies would be. Now, of course, there has been a fierce debate on what role Bitcoin should play, a borderless currency, a decentralized fiat, a new class of asset in the vein of gold or other precious metals, a harder-to-hack currency, but it seems that the market has decided for the community which role that it is going to play as it becomes more ubiquitous: a stock.

See, investors don’t spend cryptocurrency like the typical crypto-adopter might. For the investor class, cryptos have now just become a new class of asset, like dollars or euros, the yuan, bonds or ETFs. However, unlike many of those other assets, which are chosen for their stability, their consistent yields, or their dividend returns, bitcoins and other cryptos are purchased for their instability, and their relatively low trading volumes, at least when compared to the market cap of any given blue-chip stock. For example, the total market cap of bitcoin at the moment is roughly $67 billion. By no means is this small potatoes compared to where it has come from, but that is nothing compared to the market caps of Apple, Microsoft, Amazon, Alphabet, or other major players, who all have market caps over ten times that. Even including every cryptocurrency, the numbers are still small overall, with a total crypto market cap of just a bit over $300 billion, with much of that being distributed across a large number of even more volatile currencies, with even smaller caps.

As a result, when investors trade on crypto, their sheer purchase power as a percentage of the availability means that bitcoin cannot maintain independence from the rest of the investment markets at large. When markets move now, bitcoin is destined to move with those markets as investors trade it as they might with a mid-cap or small-cap stock. The downside to trading currency though is that for the currencies, you only realize your profits when you actually sell or use the currency, meaning that rather than holding onto stocks for their dividend benefits, to actually use the benefits, a person must either actually use the currency, or sell it off, with the second being far more likely for those who are buying large amounts of crypto for investment. Bitcoin and other cryptos now have the problem that they have been adopted by the investment class as an investment before it was used more widely as an actual currency, with much of the adoption being driven by the insanely-hyped stories that come out every once in a while about someone whose early purchase of bitcoin has now made them incredibly wealthy, with a lot fewer businesses and consumers using it on the streets, where usage would keep the prices more stable and resistant to the effects of market movements.

Some Knock-on Effects of COVID-19 to Look Out For

So as the coronavirus COVID-19 has been declared a pandemic this week, and has now begun to severely affect the global economy. Sure that today things seem to have started to recover just a little bit from their lows this weeks. However, we should take that touch of green with a grain of salt, and should consider some of the other things that are going on in the economy before saying that everything is going to be fine. The first thing that we need to look out for is the employment rate, which is likely to fall in the following months due to the lack of revenue being pulled in by various sectors of the economy. This would be something that could be managed if there weren’t other factors that we were pushing against.

The main concern of mine is the sheer amount of  debt that exists on both the consumer’s heads, as well as the record amount of corporate debt that has been taken on, a lot of it at junk quality, forcing higher interest rates for companies to have to repay. At the same time, many of the major companies are trying to brace investors for bad news for this quarter at least. Of course, we all know what goes first on the balance sheet when profits are squeezed, labor costs, resulting in fewer jobs, and fewer hours worked for employees.

Now, when people who need to work over 40 hours a week lose their jobs, or whose hours are cut are forced to contend with the huge amount of consumer debt that already exists, with roughly a third of it already in default, and on top of that, the new method of measuring FICO scores is set to come out later this year, it will become impossible for the consumers to, at-large, finance their lives. This will make keeping their heads above water on things like car payments, mortgage payments, credit cards, and even necessities difficult for people to afford.

Now, the worst of these effects are going to be diffused through some parts of the economy, and will take some time for different levels of the economy to feel those effects, but we can start to see the major impacts past share prices once the earnings reports for Q1 begin to roll in for major corporations, especially those with large manufacturing bases in China. Once these reports roll in, companies will need to start taking actions to keep company values afloat, cutting jobs, hours, reducing production capacity, closing factories, selling off assets, or perhaps actions that could anger shareholders, such as  suspending dividend payments, though the fear that shareholders inspire may prevent that last action from being feasible in most cases.

Things are going to get worse before they get better, and the effects just from the beginning of this year to now may not be truly felt until late summer/fall. If you are a poor consumer, I highly suggest saving what you can now, and buying extra canned goods for the next few months of shopping trips, because there are so many people who even a small interruption in their work schedule could result in economic disaster for their household. Good luck out there to everyone, stay safe, and wash those hands!