The Rise of Bitcoin: A Victim of the Everything Bubble or a Hedge Against it?

Josh Reyes
Sep 9, 2018 · 5 min read

As a millennial, I’ve witnessed nothing but extraordinary gains during most of my capital wielding life. Everything from the stock market, real estate, and of course Bitcoin has gone up.

S&P500 chart with recessions highlighted — The Economist

Ever since the GFC, the S&P500 has been on a record roll. An investor in Vanguard’s flagship S&P 500 index fund who bought shares on March 9th 2009 would have enjoyed a subsequent annualized return of 18.9%.

The Global Real House Price Index has gone nowhere but up and the two countries where I’ve lived most of my life (Canada and Australia), have had overheated housing markets that dominated headlines almost daily.

With all the happy days for investors you would expect many to think Quantitive Easing was the answer to all the world’s problems and we’re all going to be driving moon lambos in 10 years time.

Image result for when moon crypto

But as Bitcoin’s rip your face off bull run started to cool off in 2018, housing prices stabilized or fell in many of the markets that experienced massive real estate price gains, and it became clear that the S&P wouldn’t repeat the same marvellous gains it had in 2017. I started to wonder: Was part of bitcoins rise a reaction to the market starting to hedge against the pop of the everything bubble? Or were we simply rushing to junk as yields got squeezed elsewhere?

Let’s make some arguments for both!

Note: Here we’re only going to talk about Bitcoin. A lot of the ICOs and shitcoins invested in last year were definitely junk, but with over 50% market dominance and still up over 40% YOY at time of writing, Bitcoin is clearly a class above.

Bitcoin’s rise was a rush to junk

Near the end of a credit cycle as yields on risk-less securities fall, it’s inevitable that most investors look to maintain the income and returns they had throughout the cycle. This leads to capital flowing toward riskier, high-yielding assets that were previously seen as too risky such as high-yield corporate bonds, bank loans, and possibly even Bitcoin.

We saw that exactly in December 2017, as demand for high-yield bonds was insatiable and the spread on investment-grade debt dropped to levels last seen before the financial crisis.

Like Bitcoin, overseas investors made up a big chunk of the demand, hunting for higher-yielding assets than those found in domestic markets in Europe and Asia.

Bitcoin Exchange Volume Distribution October 2017 — Yahoo Finance

If we look back at high-yield spreads before the GFC you can see the same troughs before the start of the crisis.

High-yield bond index, stlouisfed.org

And now if we fast forward to the close of 2018, we’re arguably seeing the credit cycle come to an eventual end. Along with currency crises in emerging economies like Argentina and Turkey, we’re seeing corporate debt in emerging and developing economies now significantly exceeding levels before the 2008 global financial crisis. With interest rates rising in the US and the cost of borrowing increasing across emerging and developed economies its not inconceivable that we’ll see more problems start to arise.

But let’s stop spreading FUD…

Bitcoin is a hedge against the everything bubble

Many in the crypto space interpret Satoshi’s Bitcoin Whitepaper as a response to the GFC, given the timing of its release 2008. Along with it’s recent branding as digital gold, debate has broken out as to whether Bitcoin will eventually overtake the precious metal as a store-of-value and hedge against economic downside.

During previous financial crises, capital has flown away from assets that mirror the economy (such as cash and real estate) and pumps into assets that are considered a hedge due to their limited supply which can’t be affected by economic conditions. With Bitcoin’s capped 21 million supply and transparently scheduled mining reward enshrined in its programming— it certainly meets that investment criteria.

And with currency crises and some economic turmoil happening in emerging economies this year, we’ve already seen a spike in trading volume in those markets, as locals rush to get their money out of local currency. Bitcoin volumes surged on Turkish crypto exchanges as the drop in the Lira intensified last month.

In fact if you look at Bitcoin exchange volume over the past 6 months. The majority of currencies exchanged for BTC outside developed economies are currently facing increasing currency or debt pressure and low performance against USD. Some of these countries including the Ukraine, Brazil and Indonesia:

BTC Exchange Volume, Bitcoinity

However with no global or large scale financial crisis since the inception of Bitcoin in 2008, it’s all a guessing game on whether or not Bitcoin will be adopted as a hedge against economic turmoil at scale. Hopefully we don’t have to find out, but if we do at least we’ll have an answer!

Thanks for reading! Would really appreciate any feedback or comments. You can keep up to date with my future posts by following me on twitter: https://twitter.com/vancityreyes

This blog by no means is meant to fully answer my question nor is it meant to be investment advice. I simply want to overview some of my research and thinking, and you can make your own decision on whether or not to start hoarding some Bitcoin.

Josh Reyes

Written by

Co-founder @sendytoken | Marketing @smartrmail

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