One of the most enduring cryptocurrency-related narratives revolves around the search of crypto’s definition as an asset class. Is Bitcoin (BTC) more of a digital currency or digital gold? Do its unique properties warrant viewing it as something completely distinct from the established categories of financial instruments? A recently published report by JPMorgan Chase’s strategists has sparked yet another round of such debates.
The conclusions that the report presents are at odds with the “Bitcoin as a safe-haven asset” trope that has become somewhat conventional wisdom lately. The authors contend that the original cryptocurrency is actually not that great of a hedge in a situation when markets are undergoing severe stress and that expansion of retail ownership has rendered it more similar to a cyclical asset that moves up and down along with the stock market.
It’s reasonable to discuss the argument of JPMorgan’s analysts with finance-savvy commentators to assess its strength, as well as to weigh in on what the recent developments in crypto markets can tell the general public about the nature of digital assets as a class.
A different kind of hedge
A good hedge asset should be resilient to the forces that can diminish the value of most other assets in an investor’s portfolio. The case of JPMorgan’s strategists against BTC’s hedging capacity seems to heavily rely on observations from the last year, when both crypto and traditional markets plummeted in March over the COVID-19 scare kicking in, only to start climbing to their respective record highs shortly thereafter.
The argument presented in the report is also rife with assumptions. It presumes a very particular definition of a hedge asset that only takes into account a limited number of risks it safeguards against. Furthermore, it implies that cryptocurrencies behave more or less uniformly across various market conditions.
Brock Pierce, chairman of the Bitcoin Foundation, noted to Cointelegraph that as a maturing asset, Bitcoin’s behavior does not necessarily follow a rigid pattern in all situations: “I agree with them, in a sense, that it is not a ‘hedge asset’ because it’s been growing into what it can be.” He went on to add:
“At times, it was a great hedge against inflation in many countries throughout the world. At times, where there is general ‘risk-on,’ or ‘risk-off’ in the markets — stock markets and bond markets — we are seeing that Bitcoin may follow that — as it tends to be the most ‘liquid’ asset for many people.”
Amber Ghaddar, founder of decentralized capital market AllianceBlock, who had previously held senior positions at JPMorgan, commented to Cointelegraph that “as a pure hedging asset and on shorter intra-month and intra-quarter timeframes, Bitcoin has been a poor hedge to acute market stress compared to the USD, CHF and JPY.” Therefore, she agrees with the assessment from JPMorgan: “This is due to the fact that Bitcoin lacks the short base that sponsors USD strength during market shocks.”
However, Ghaddar added, this is not synonymous with BTC being unable to serve as a hedge to events like a destabilizing rise in inflation or a policy shock. To her, Bitcoin is best described as:
“High volatility, high return investment that is driven by its idiosyncratic characteristics and delivers portfolio diversification rather than a pure hedging tool in a portfolio.”
Another point to note is that amid the black-swan, pandemic-induced market collapse of March 2020, nearly all liquid assets were highly correlated in their simultaneous decline. So this doesn’t necessarily mean that Bitcoin and stocks should demonstrate a similar relationship across the board, for example, between S&P 500 and BTC’s price.
Seamus Donoghue, vice president for sales and business development at digital asset infrastructure provider Metaco, told Cointelegraph that in the wake of acute liquidity events, such as the stock market crash in March 2020, correlations for all assets trend toward 100%, and all kinds of assets get sold to raise liquidity. Furthermore, he questioned how the report only considers certain risks but not others:
“The authors seem to conflate hedging acute liquidity events, which is always about moving all assets to cash, and hedging risks such as monetary and fiscal mismanagement. It is important to distinguish between short-term liquidity impacts on assets from fundamental attributes and properties of hard assets like gold and Bitcoin.”
Konstantin Richter, CEO and founder of blockchain firm Blockdaemon, commented to Cointelegraph that aside from the largely exogenous shock from the pandemic in spring 2020, there hasn’t really been any adversarial conditions in the economy that would truly test crypto against other assets as a store of value hedge. Richter is convinced that once such a test will be applied, digital assets will outperform any competition.
Still not cyclical?
On the subject of whether Bitcoin is coming to resemble discretionary stocks that are doing well when the overall economy is thriving, those who shared their thoughts with Cointelegraph largely remained unconvinced. Ghaddar disagrees that “retail adoption is raising its correlation with cyclical assets.” In fact, she believes that it works the opposite way: “Most retail investors prefer to HODL (buy-and-hold) the Bitcoin. The same is not true for new institutional and speculative money that has recently been poured into Bitcoin.”
Ghaddar also noted that the correlations observed by the authors of the report could be simply an artifact of a measurement tool they used. When applying Spearman’s correlation coefficient instead of the widely used Pearson’s coefficient, Ghaddar’s team did not observe crypto assets’ prices varying together with other asset classes significantly.
Some even called JPMorgan’s motivation to reach the conclusions outlined in the report into question amid the rollout of the JPM Coin. Louisa Murray, vice president and head of sales at banking platform Railsbank, commented:
“One can assume it is where their interests ultimately lie. If we dismiss Bitcoin as a cyclical asset, we forget the fundamental principle of why there is Bitcoin — namely, as an alternative electronic payment system to the financial institutions that act as the ‘trusted’ third party in financial transactions. It’s, however, these third parties that add additional costs to any traditional financial transactions, which Bitcoin tries to solve.”
Crypto assets’ distinctive features
At the end of the day, what is left in terms of the properties of crypto as an asset class? Pierce thinks that there is still much fluidity to Bitcoin’s status as a financial instrument, as he commented: “What we have learned about Bitcoin’s nature as an asset in the last year is: What it is, and what it can be, and how it will be able to affect people’s portfolios and investment decisions is evolving at a rapid pace.”
There are also unique features that one can pinpoint with confidence. Bitcoin’s key advantages are faster settlement and a wider global exposure compared to any asset in the traditional financial market. Ultimately, cryptocurrencies now have a chance to develop key characteristics — such as means of payment — and not merely as the means of investment. In the long term, this can untangle them from traditional financial assets.
Furthermore, Murray anticipates crypto becoming more regulated and accessible, which would reduce market volatility. With the younger generations investing their money differently, Murray expects to see “new cyclical patterns occurring in the future, possibly with markets following crypto, and not vice versa.”