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Mar 22
2020
Is Bitcoin a Safe Haven? A Note from CZ


After a few recent media interviews, I decided to share my thoughts on some of the topics in a blog post. Many of the questions are paraphrased. The answers are purely my own personal opinions and are not guaranteed to be correct, if at all. Please use your own judgement. This is not financial advice.

Q: With the global markets crashing, Bitcoin has not been immune to the losses plaguing other markets. Is cryptocurrency really a “hedge currency”, “safe haven” or “store of value” as the crypto people claim it is? Are you worried about Bitcoin or cryptocurrencies?

A: No, I am not worried about crypto at all. The fundamentals did not change. Unlike fiat, bitcoin remains a currency with limited supply. No one can print more of it. Demand is increasing, especially now. It will be fine.

Instead of a naive black-and-white view of “safe haven” or not, we need to take a deeper look at how things work in the real world, which is usually in greyscale. There are many factors and time horizons to consider here, but first let’s use an analogy.

Say you take a swimming float, it works and it will help you float in water. Now let’s say it’s attached to the Titanic as it is sinking. Will that float work get you to the surface now? No, it won’t. Is it because the float no longer works? No, the floating properties of the float still work… You get the idea.

Fundamentally, bitcoin or cryptocurrencies have not changed. They still work. They are still in limited supply, no one can arbitrarily print more of it. With fiat being printed at a record pace, you decide what will happen, in time.

Q: Why did Bitcoin go down then?

A: Well, bitcoin is a freely traded asset. The price is determined by the market, or the people collectively in the market, through trading. Again, there is a range of people involved here, and multiple dimensions we need to consider. I will just mention two dimensions here.

Dimension one, die-hard believers vs new-to-crypto.

There are the die-hard crypto believers, with most of their assets in crypto. They rarely sell crypto into fiat (unless they are about to spend it), and they have no fiat left to buy more crypto even if the market drops. This group doesn’t matter much. They don’t/can’t trade.

They are people who strongly believe in crypto and have significant portions of their investment portfolios in crypto. When they get more fiat, they buy crypto. When there is a dip, they buy.

There are people who are relatively new to crypto. This group may or may not understand or believe crypto deeply. When they feel there are risks, they sell. When there is panic, they sell.

Then there are many many people who have never touched crypto yet. They don’t matter much either for this discussion. But they are potential buyers in the future.

Dimension two, have spare cash vs scramble to pay rent.

Some people manage their financials (and living style) so that they have a cushion in their funds. When their investments (stock or crypto) drop a bit, they are still fine with paying living expenses. Ie, they can weather a downturn without much impact on their living standard. In fact, many of them buy the dip.

There are people who depend on short term gains in their investment portfolios to pay rent. When the stock market drops, they are forced to sell crypto to cover their living expenses.

The proportion of each type of investor in the market is unknown to anyone. It changes over time too. Their relative strength or conviction to sell/buy is dynamic too. When the stock market crashes hard, more people will feel the cash crunch to a higher degree and, hence, a stronger conviction to sell crypto in the short term as well.

There are many other dimensions for market demographics and psychology, but you get the point.

Size

Size matters for our discussion. The stock/fiat market is about 1000x bigger than the crypto market. When the stock market crashes, a lot of value disappears, often many times the total market cap of crypto. It is very much like a Titanic sinking and you are swimming near it. The suck-down effect is real. Better hold on to that float that is not attached to the Titanic and you will eventually get back to the surface.

Coronavirus

The 2008 financial crisis didn’t involve a pandemic. The dynamics and psychology are a little bit different. With roughly only 1 in 1000 people having or accepting crypto, it isn’t so useful in a pandemic situation just yet. When people fear the doomsday of empty shelves in stores and a shortage of food, people will want to hoard cash. So there's increased demand or pressure of people wanting to sell their investments (stocks or crypto) into cash, again in the short term. 

In theory, gold prices should go up, but that didn’t happen either. Alas, there are other factors: gold is hard to carry, hard to verify, and, similar to bitcoin, many people won’t accept gold in a food transaction today. There are also other common factors, such as “speed” mentioned below. Unlike bitcoin though, I believe gold is sunsetting, whereas bitcoin is just starting.

On the positive side though, the coronavirus, as deadly as it is, will pass. A vaccine will be developed sooner or later. As much as we overly rely on a global supply chain, which is grinding to a halt. No nation as of now has a big shortage of food. People hoarding cash will eventually find out they no longer need to hoard it and will put it back on investment.

Q: The Feds are printing money, why doesn’t the bitcoin price go up? Like people said it would?

A: There is a concept of speed. “Eventually” was the keyword in the last paragraph. Markets are inefficient. The speed of change propagation is slow, which actually gives us plenty of opportunities.

The Feds announced they are printing more money, but have you got it yet? No.

Have the banks got it yet? Some yes, most no.

Have you applied for a new loan yet? Probably no.

Have you bought a new car with the loan yet? Probably no.

Have people bought more bitcoin yet? No, in most cases. Many of them are still panicking over toilet paper.

These changes take time to propagate in the economy. Changes don’t happen immediately when a mass population is involved.

There are other more practical aspects of speed. Due to inefficiencies in fiat transfers, it takes time for people to deposit money into crypto exchanges to buy bitcoin. There is always a delay in the market.

Q: Is crypto not a safe haven?

A: You make your own judgment. I made mine.

Either way, I hope you understand there are many factors at play in each moment. Don’t expect bitcoin to be guaranteed to go up when the Dow Jones index crashes, or vice versa. It’s not a perfect inverse correlation product. If you want that, you should just short the Dow Jones Index futures.

Q: Why are you so bullish about crypto all the time? What issues do you see with the current financial system?

A: Fundamentally, I believe the current (or what I usually call the legacy) system is broken. And bitcoin fixes this.

We should not hate the players but hate the game.

I’ll give you a couple of examples. In a Wall Street analyst call, do you hear investors or analysts ask CEOs “do you have enough cash reserves to survive an economic downturn or a pandemic that halts supply lines?” Or do you hear them asking “What's your profit this quarter? What’s new? How are you going to push stock prices up, now, not next week, not tomorrow, today, now?”

Imagine two CEOs in a boardroom. One says “we will save 50% of profits this quarter for a rainy day, in case there is a pandemic or economic crisis.” The other one says “we will use 95% of our profits this quarter for stock buybacks. Stock prices will go up...” Guess who is going to get a round of applause and who will be booted out of the room? And guess what CEOs are trained to do? They do the short term thing.

So, can we blame the CEOs? Not clear. Some of these CEOs may even view themselves as heroes, sacrificing themselves (risk getting fired during any slight economic downturn), while “maximizing shareholder value” when they still have the job. They usually don’t mention the $100,000,000 USD bonuses they received. But if you are in their shoes, or have a chance to get into the position they are in, will you refuse the chance? Will you do it differently? Unlikely. It’s the system that’s broken.

Q: Why do governments keep bailing these companies out then?

A: Short answer: Beats me.

Long answer: Well, these companies are deemed too big to fail. One failed bank could result in retail investors realizing losses in the hundreds of billions of dollars. 

So, why not let the banks fail and print money to give to the retail investors who lost money instead of the banks? I definitely want to agree with you. There are many possible reasons. 

It’s probably more expensive to do so. In 2008, Lehman had a debt of $680 billion supported by only $22.5 billion of capital, a shortage of $660 billion to make the retail investors whole. This is just one bank, and there are hundreds of them, per country. In this light, it makes perfect sense to print 2 trillion if that can restore investor confidence. It’s the cheaper way, for the time being, each time. 

The optics / PR are also different. With printing money, the taxpayers are robbed (made poorer) indirectly, but they don’t complain much. At least, not as much as if a bank failed, such as Lehman, then everyone knows exactly who to blame, which CEO/regulator/politician failed, etc. When printing money this way, everyone saves face and is happy, except for the poorer retail guys. But they don’t know anything, do they, so it’s ok.

Q: Wouldn’t this just create bigger issues down the road? 

A: You bet. But that’s someone else’s problem. A few years later, some other sucker will deal with it. Sadly, that new sucker will have no other choice but to play the same game. The new sucker will be highly paid too, so it’s ok.

Circling back to the topic of why I am always bullish on crypto. 

Bitcoin fixes this. With crypto, it’s different. No government bailouts, at least not by printing money. This breaks the cycle. It doesn’t magically solve all problems. Companies will still fail, some users will still get hurt. There is still strong demand from investors for short term gains. Some CEOs will still be short-term greedy over long term sustained growth. But these companies are less likely to get very big. No kicking the can down the road.

Also for the reasons above, I rarely hate or attack anyone specifically. There is no point. When you see through the underlying reasons, it’s the system that made them work that way.

Is there anything different this time vs 2008?

Yes, I believe there are differences. In 2008, there wasn’t a pandemic pausing global economy. But I believe the Coronavirus is just a trigger, not the root cause. Our economy should be stronger, at least strong enough to survive some shocks.

More importantly, in 2008, we didn’t have much of a choice but to hope the system that caused the problems will somehow magically heal itself. But this time, people have more choices.

Long Bitcoin, short the bankers.

CZ