Bitcoin has always been regarded as "digital gold", and the public has high expectations for Bitcoin's hedging characteristics. Why did the hedging characteristics of Bitcoin fail this time? Uncle Kai answered 7 related questions:

This article is a summary of Uncle Kai’s views in the debate on “Whether Bitcoin is a safe-haven asset” at the TokenInsight Summit Global Super Industry Summit on March 20:

Question 1: What can be called a safe-haven asset?

If you want to have a fruitful debate and avoid talking about chickens and ducks, it is very important to first clarify what the concept and scope of the "safe haven assets" we are discussing are.

Risk is a very broad concept. There are natural disaster risks (such as epidemics, earthquakes, etc.), social unrest risks (such as turmoil, wars, etc.), and inherent business risks in the industry (such as planting. Business risks), compliance risks arising from changes in regulatory compliance, operational risks in the daily operation of enterprises (such as technical hacking, server interruption of service due to operational errors, etc.), and risks arising from asset price fluctuations in the financial market itself.

So we discuss whether Bitcoin is a safe-haven asset, mainly for the last item: the risk of asset price fluctuations in the financial market.The most important function of the financial market is price discovery (Price Discovery). Therefore, various factors that affect prices, including most of the risks mentioned above, can be reflected in the price fluctuations of corresponding financial products under certain prerequisites. Therefore, when we study risks, we mainly start with the price fluctuations in the financial market.In other words, discussing whether Bitcoin is a safe-haven asset refers to discussing whether Bitcoin can reflect its price trend independent of other financial assets when the financial market is violently turbulent.

Question 2: Is Bitcoin a safe-haven asset?

To test whether Bitcoin is a safe-haven asset, you only need to look at the correlation between Bitcoin price and the S&P index (S&P 500 is generally used as a barometer index for financial markets). As shown in the figure below, it is obvious that under the influence of the epidemic, Bitcoin rose and fell at the same time as the stock market, and did not reflect the role of safe-haven assets at all.

Bitcoin is not a safe-haven asset, but a risk asset.

The yellow line is the S&P 500, the blue line is Bitcoin, and the purple line is gold

Question 3, Has the hedging property of Bitcoin been verified in history?

Bitcoin's safe-haven properties have never really been verified in the market.

Bitcoin was born after the 2008 financial turmoil. One of the incentives for the founder Satoshi Nakamoto to design Bitcoin is to see the central banks of various countries continue to print money to rescue the economy, so he decided to design a currency that is completely decentralized and has a constant total amount of issuance. Since the financial turmoil in 2008, the global economy has been smooth sailing, and Bitcoin has never had the opportunity to truly be tested by the market.The new crown virus detonated great turmoil in the stock markets of various countries, which was the first real test of the characteristics of Bitcoin as a safe-haven asset. Unfortunately, it failed the test.

Question 4, is Bitcoin really inescapable of any risks?

What holding Bitcoin avoids is other types of risk that are different from the volatility of financial assets. Bitcoin has unique characteristics, such as being based on distributed blockchain technology, a constant total supply, and a framework without borders and centers. Therefore, holding Bitcoin will not freeze, confiscate, and seize assets. Counterfeiting, compared to sovereign currencies, Bitcoin is anti-inflation. Therefore, Bitcoin can resist such risks, but blind followers often mistakenly believe that Bitcoin can also hedge against market volatility risks.

In this global stock market volatility, investors who originally thought that Bitcoin could become a safe-haven haven caused investors to panic after the myth of Bitcoin’s safe-haven asset was shattered, and they sold their self-insurance one after another, causing funds to flee and stampede, which intensified The rapid decline momentum of Bitcoin in a short period of time has set an astonishing decline of 50% in one day and 2/3 in a week, becoming the investment product with the largest decline and the highest risk among all asset classes.

Special emphasis is placed on the risk of anti-inflation. In fact, this is not a feature of Bitcoin. Stocks, real estate, gold, and bonds with an inflation rate index can all become effective anti-inflation investment tools.

Question 5. Before this storm, Bitcoin had little volatility with the stock market. Why can’t Bitcoin be judged to have a safe-haven attribute based on past performance?

It is wrong to use the normal market conditions to determine the hedging properties of Bitcoin.The so-called raising troops for a thousand days and using them for a short time, the role of safe-haven assets should be reflected when risks come, otherwise it will be worthy of the name of safe-haven. Just like you usually buy auto accident insurance, if the insurance company stipulates that only the normal state of the policy will work, and the abnormal state will not be covered, then what is the meaning of the policy?

Early participants in Bitcoin were mainly geeks, people in gray or black industries, speculators and believers. The market is small and the number of participants is small, so the price of Bitcoin is completely independent of the economic environment. This is a special period, and it is very one-sided to judge the hedging properties of Bitcoin based on this period.

With the increase of Bitcoin users and the increase in volume, especially the influx of derivatives and institutional customers, the connection between Bitcoin and the traditional financial world through capital flow is getting tighter and tighter. However, most institutions and professional investors do not consider Bitcoin as a safe-haven asset, but position Bitcoin as a high-risk financial alternative asset.

The main reason for the sharp drop of Bitcoin this time is because of the shortage of liquidity in the world. Everyone panics and wants to exchange for cash, so they first abandon the assets with high risk, and Bitcoin belongs to this category, in exchange for assets with low risk. Such as treasury bonds, U.S. dollars, etc.

It is worth mentioning that in the digital currency industry, the emergence of stablecoins has also greatly weakened the few remaining hedging functions of Bitcoin. Over the past 17 years, with the issuance and use of more and more stablecoins, users have regarded stablecoins as a more safe-haven product than Bitcoin. This also explains why in the recent extreme market conditions, Bitcoin has plummeted, while stablecoins such as USDT have an 8% premium.

Question 6, what conditions are needed for Bitcoin to become a real safe-haven asset?

Two important conditions are required: pricing and volume.

Compared with other financial assets, the biggest flaw of Bitcoin is that there is no recognized anchor value base. So far, no one in the world has been able to come up with a convincing Bitcoin pricing model, and everyone is still in the dark about the true intrinsic value of Bitcoin. Such as gold, real estate and stocks, they all have a recognized pricing basis, and their intrinsic value can be calculated. Even if their prices fluctuate up and down due to the extreme external environment, they still fluctuate around the value after all.

This is like a big storm coming. Even if a ship with an anchor shakes up and down, it will not be blown away by the storm. Bitcoin is now a ship without an anchor. Wherever the wind and waves blow, the ship will be blown away. Such a volatile investment product like Bitcoin is difficult to become a real safe-haven asset.

Another thing Bitcoin lacks is market size. The Bitcoin market is too small. The total market value of Bitcoin is 100 billion U.S. dollars, which is similar to the market value of Tesla and less than 1/10 of the market value of Apple's stock market. Up front, Bitcoin is a baby. Taking gold as a reference, the global daily trading volume of gold (including derivatives and ETFs) is about 300 billion U.S. dollars, which is 6 times that of Bitcoin’s daily evaluation of 50 billion U.S. dollars.

If the stock market under the financial turmoil is compared to a big ship that is about to sink, the big ship will sink, and only a lifebuoy of Bitcoin is not enough. A market as small as Bitcoin, even if conditions permit, is unable to assume the function of a safe-haven asset and cannot save the entire ship.

There are fundamental reasons for the small size of Bitcoin: there is no recognized pricing model; its application scenarios are limited; most of the regulations remain vigilant; It is a challenge that coins cannot overcome in a short period of time.

Question 7, the myth of Bitcoin as a safe-haven asset has been shattered, what inspiration and impact does it have?

This bloody reality will pierce the myth of Bitcoin as a safe-haven asset and will change users' positioning of digital currencies. When discussing the Bitcoin category, people often call Bitcoin a "synthetic asset": it has the commodity and hedging attributes of gold, the payment and price measurement attributes of currency, and the investment and speculative attributes of securities. Now, due to the emergence of stablecoins and the large fluctuations in the price of Bitcoin itself, its currency attributes are no longer worthy of the name. The plunge of Bitcoin this time also made the title of digital gold seem out of place, and finally its securities attributes remained. This will inevitably reduce the willingness of some investors to hold Bitcoin, which is generally a negative impact.