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Grayscale Study: Bitcoin’s Potential Role As A Hedge Against Liquidity Risk Through The Lens Of Macroeconomic Developments

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Grayscale has published a study entitled “Hedging US-China Trade Risk with Bitcoin.” The author of the study, Matthew Beck, believes that cryptocurrency provides investors with unique opportunities and should be in each long-term portfolio.

Over the past 60 years, Goldman Sachs has recorded 11 crises that have occurred in the financial markets of the United States, Europe, and Asia. They caused significant damage to the economy, for example, the S&P 500 fell by almost 50% during the Global Financial Crisis (GFC), which began in October 2007 and ended in March 2009.

Over the past 10 years, a bullish trend has been observed in the market of high-risk assets (for example, Bitcoin and gold). Therefore, each investor must monitor the dynamics of changes in liquidity risk and be able to use hedging instruments before the onset of another crisis.

What Is Liquidity Risk?

Liquidity risk is the prospect of losses caused by the mismatch of the maturities of liabilities for assets and debts. An imbalance can manifest itself in the form of deflation or inflation. When the liquidity level is not high enough to service debt or stimulate economic growth, deflation occurs. Too high a liquidity ratio, on the contrary, leads to inflation.

The low level of diversification of most traditional investment portfolios does not protect the owner from liquidity risk since it mainly includes only shares. The exchange rate of securities usually reacts negatively to pressure caused by deflation and inflation. Thus, the ability to correctly formulate a portfolio is one of the key skills that a successful financier must possess.

An increase in the liquidity risk indicator is nonlinearly related to the dynamics of changes in financial leverage (leverage). In 2018, the amount of debt reached its maximum level over the past 10 years ($ 250 trillion), so there is a high probability of a liquidity crisis.

Bitcoin As A New Risk Hedge Tool

Bitcoin can be used as:

  • Means of savings;
  • payment unit;
  • investments in the development of blockchain technology.

The dynamics of the BTC exchange rate usually does not coincide with the market indicators, so the virtual currency can reduce the liquidity risk. The coin is not suitable for all investors, however, Grayscale employees believe that Bitcoin should be added to a long-term portfolio for a position of a stable strategic asset.

US-China Trade Conflict Escalates

The trade crisis between the U.S. and China began in 2017. The conflict escalated on May 5, when Donald Trump announced an increase in trade duties on Chinese goods from 10% to 25%. In response to the actions of the Americans, Beijing also increased tariffs from 10% to 25%. Negotiations between the countries at the G20 summit did not lead to positive results, and on August 1, the U.S. President announced that the increased rate would begin on September 1, 2019.

The US and China account for about 40% of global production, so the conflict between these states will have an impact on the global economy. According to experts of the International Monetary Fund, a trade war between the countries will violate the international supply chain of products and jeopardize the predicted growth of the financial market. A crisis can cause a domino effect and lead to a decrease in liquidity.

bitcoin grayscale research

Between May 5 and August 7, investments in Bitcoin brought a profit of 104.8%. Investments in 20 other assets (for example, the ruble, S&P 500, British pound, Bloomberg Commodity Index) turned out to be unprofitable by an average of -0.5%. Thus, traders who added BTC to the portfolio reduced their losses or gained a plus (depending on the share of cryptocurrency with other assets).

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