By 2020, Global assets under management (i.e. directly within the financial system) will exceed $102 Trillion. Roughly one third of this figure will be pension funds alone.
As illustrated in 2008/09, the financial system is intertwined with such complexity that knock on effects are nearly impossible to predict. Movements in ‘fair value’ of assets can swing with incredible volatility, rendering enormous banks insolvent. Savvy investors diversify across asset classes, currencies and institutions to reduce systemic risk and reduce potential exposure to interest rate changes, inflation, wars, recessions, banking failures, etc..
However, how can an investor properly hedge against systemic risk when nearly every asset type is affected? How can an individual or even a business protect itself should a nation’s banking system cease to function even temporarily?
Ten years ago, thinking about these supposed doomsday scenarios would have seemed irrational and paranoid. However, if you are resident in Greece, an EU country, you know exactly what capital controls and banking restrictions feel like. A few years ago it was Cypriots who experienced the previously unthinkable … a banking bail-in.
Systemic risk is real and possibly higher than ever before given the indebtedness of nation states (reducing the likelihood of a government bail-out). Today’s EU *policy* is that banks will have to bail-in their customers to rescue themselves going forward.
Enter Bitcoin: The World’s first truly non-systemic asset that is still highly portable (electronic) and divisible.
What would the value of an asset be if it is one of the only ways to trade or move value? How much Bitcoin should a business buy should it want the ability to continue to trade on a Sunday or during a bank holiday … or during capital controls? What percentage of assets should be held in Bitcoin to provide adequate ‘insurance’?
Governments around the World are quietly enabling Bitcoin to flourish (e.g. changing categorisation so it is VAT exempt), and one of the reasons is that they too would prefer to reduce the systemic risk within their economies. Nations, like their people, must become resilient against banking/systemic failure.
During the period where Greece was close to leaving the Eurozone, the price of Bitcoin rallied strongly. Not due to Greek panic buying, but instead due to buying pressure from others worldwide who realised having some Bitcoin may be the best way currently available to hedge against systemic risks over which they have no control.
Asset managers globally will gradually realise that Bitcoin is a non-systemic asset, a very valuable hedging option and therefore make it a small part of their portfolios.