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Monday, November 23, 2020

Bitcoin is an asymmetric bet and here’s why you should hodl it

The prominent narrative for Bitcoin has been its correlation with Gold and its ability to be a store of value. This narrative has been driving growth and the correlation between Bitcoin and Gold.

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The correlation between the two assets has been on the rise lately and sits at 60% on a 30 days basis. As this narrative gains strength in the market, traditional investors were likely to hold Bitcoin and gold positions potentially for the same reason of hedging against the market scares. This may lead to Bitcoin and Gold to have directionally similar price movements, according to a report from Ecoinometrics.

2008 and 2020

This narrative becomes even more important when compared to the financial crisis faced in 2008, wherein the Fed balance sheet had grown by 150% and the quantitative easing programs pushed the growth over 400%.

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In 2020, the Fed has already expanded its balance sheet by about 70%, while the European Central Bank assets have expanded by almost 40%. Bank of Japan was not far behind as its balance sheet was up 20%, but it has been on a path to infinite QE since 2013, so that did not come as a surprise.

This map made more sense when we zoomed out to 2008 and compare the growth of the central bank’s assets since. The surge in the balance sheet was the Fed trying to address the liquidity crisis, however, the following year of QE programs end up doing the real damages in the form of asset price inflation and distorted financial market.

Even though the ECB and Fed tried to deleverage after 2008, it did not have any impact.

As per the report:

“The expectation that this pattern is going to continue is what’s leading many investors to seek sound money in order to preserve their wealth.”

Bitcoin will decouple from Gold

The narrative of ‘Bitcoin being a better gold than gold’ will be affirmed when at some point Bitcoin starts to eat away at the total market value of Gold. This point will result in the decoupling of the two assets, which for now, is almost 50x. This was a huge gap and the potential upside for Bitcoin is massive, making it an asymmetric bet.

However, as this narrative has not yet been dominant among traders, it can provide an edge to the long-term hodlers.

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