The Strange Story of Bitcoin & A New Financial Order

Despite the skeptics and critics of Bitcoin as an asset class or a currency, there is one thing that is compelling about the shift in money (speculative, retail and increasingly institutional) into Bitcoin: it’s the idea of a safe haven from the implosion of the fiat money system.

As a currency, it does not serve as a stable store of value with a volatility of 480% and a mean annual return of 226% over the last eight years. Is it an inflation hedge? 

Well if you compare its annual movements with the CRB All Commodities Index, it has very low correlation of 25% and with gold, the correlation is slightly higher at 39%. Against equity assets such as the S&P 500 and Nasdaq, the correlation with Bitcoin is around 45%.

So in principle, Bitcoin’s low correlation with most asset classes makes it a potentially good asset class to be part of a diversified portfolio. But what is interesting in my study is that Bitcoin is reasonably well correlated with Emerging Markets as shown in the chart below. Does this suggest that it is also inversely correlated to the U.S. dollar?  

Based on the three key functions of a currency (measure of value, store of value and means of exchange), Bitcoin does not qualify as a viable and efficient currency given that its value fluctuates and it is slow in processing transactions.

But the key attraction of Bitcoin, apart from serving as a diversification tool for portfolio investors, is that it is a decentralized currency that is independent of government and central bank controls, and by implication, it has no underlying liability.

Anyone who holds fiat currency will be subject to devaluation in its real purchasing value as central banks continue to print money and debase the currency in order to reduce their public debt burdens. 

In the past year, governments have piled on their debt levels in order to rescue their economies from the pandemic-induced recession. This increase in debt was accompanied by massive money printing by the U.S. Federal Reserve, the European Central Bank and the Bank of Japan among the leading economies.

It is therefore no surprise that the fear of fiat money devaluation and hyperinflation has driven demand for Bitcoin, whose supply is limited at 21 million units.