22nd Oct 2020

Why Professional Traders See Bitcoin as a Hedge Against Volatility

During the turmoil and economic crisis brought on by the global pandemic, Bitcoin has emerged as a viable hedge against volatility. So much so that it has even been referred to as ‘digital gold’ thanks to its similarity to physical gold as a safe haven and its weak correlation with other financial markets. Bitcoin’s reputation as a hedge against uncertainty has been so strong in recent years that during the 2019 turmoil in Hong Kong and Argentina, local investors were willing to pay 10% higher than the market value for the digital currency. This was at a time when the value of BTC was above $10,000.
Bitcoin price volatility has declined recently, and many believe that the trend may continue adding to its value as a safe haven investment. There are 4 main reasons for this.
One of the things that sets Bitcoin apart is its permissionless nature. The ability to buy and sell cryptocurrencies without the need for any third-party intervention is unique to blockchain technology. Both fiat currencies and gold require permissions from either the government or financial institutions or both. In addition, cross-border transactions are much easier and cheaper than assets that involve third parties.

This makes Bitcoin highly accessible, allowing anyone to send and receive Bitcoin. On the other hand, fiat currencies face a high degree of uncertainty, since they require third-party custodials. 
It is important to remember that Bitcoins is not completely seizure proof. But BTC does provide high seizure resistance, in the manner that the cost of seizing the digital currency is higher than seizing any other monetary asset. This seizure resistance nature is further increased with the help of hardware wallets and multiSig.

On the other hand, gold and fiat currencies offer very little seizure resistance. In fact, when Franklin Roosevelt passed Executive Order 6102, gold was seized by the US government from its citizens, to fund the New Deal policy. Then came the Gold Reserve Act of 1934, which caused the devaluation of the US dollar against its gold fix. The official rate increased from $20.67 to $35 per ounce. Plus, gold and cash are also regularly seized at the borders by government officials. 
Similar to the above point, Bitcoin is not completely censorship proof either. However, the way in which transactions are made apparent on the network and then recorded does put up high barriers to censoring transactions. In addition, since Bitcoin is a decentralised currency, no single authority or actor can censor a transaction. Plus, the use of cryptography and the technical design of the blockchain networks ensure that once a transaction is completed, it cannot be reversed. The censorship resistant nature of Bitcoin is what made Julian Assange ask for donations for Wikileaks in BTC, after Wikileaks was banned from all other platforms.
During economic recessions and time of high inflation, central banks might choose to print more units of the domestic currency, to give the economy a boost. This creates uncertainty in the forex markets. In the case of Bitcoin, however, the opposite is true. Bitcoin has a set limit of 21 million, established at the time the cryptocurrency was created. This means that there is no confusion regarding the demand and supply of the digital currency.

For some, using Bitcoin as a hedge against volatility might seem odd, given the volatile nature of the digital currency itself. However, hugely uncertain geopolitical and economic environments make traditional assets less reliable. We saw the crash of oil, a traditional safe haven investment, driven by the global pandemic-led lockdowns. The US dollar has also weakened significantly through 2020, while gold has been more volatile than usual. This has sent investors flocking to BTC, which emerged as a viable alternative to these traditional safe havens.
Tovuti hii hutumia vidakuzi ili kuhakikisha kuwa unapata uzoefu bora kwenye tovuti yetu.