On the Status of Bitcoin as a Flight to Quality Asset
Bitcoin’s decline yesterday on news of Iran attacking Israel has inspired another round of mockery from the skeptics about its “flight to quality status.” I’ve never agreed with this critique, in part because I’ve never agreed with the supposed value prop BTC has failed to live up to.
There’s no such thing as a flight to quality asset that always goes up when something goes wrong. Gold rallied yesterday when Iran attacked Israel — as the skeptics keep pointing out — but it fell precipitously when Russia invaded Ukraine. People started dumping Treasury bonds at the peak of the COVID panic. Cash was a great flight to quality asset in October of 2008, except at Lehman brothers, and every other bank that needed a bailout, which was most of them.
The point being: markets are complicated, and the initial knee-jerk reaction for any asset during an unexpected event is seldom definitive. Bitcoin famously lost half of its value at the start of COVID. But it was trading 5x higher a year later. Stocks also fell and then rallied, but even on a risk-adjusted basis, Bitcoin outperformed materially, after it was declared dead as a flight to quality asset.
But this too is an oversimplification, because most assets fell when COVID hit, then rallied when people realized all the stimulus would lead to inflation, then went back down when the Fed started hiking, and so on. This is what happens when the numeraire — central bank issued fiat money — becomes overly managed and unmoored.
Each asset also has its own supply and demand dynamics. The price of oil remains down significantly from its peak after the start of the Russia-Ukraine war because supplies have been plentiful and sanctions enforcement lax. Gold made an all time high even as the Fed hiked rates because central banks are loading up, likely for geopolitical reasons. Bitcoin benefited from ETFs creating a new source of demand, and so on.
People who are disappointed about Bitcoin falling this week have over indexed on the “digital gold” narrative. With respect to the otherwise smart people who believe in it, this was always a stupid designation. We already have actual gold, and it has certain properties that Bitcoin never will, like simplicity, or still being usable in the event of a grid failure or zombie apocalypse.
Bitcoin’s value prop is that like gold, it exists outside of the banking system and its many shortcomings, particularly in a crisis, but unlike gold, bitcoins are universally accessible, easily storable, perfectly fungible, instantly verifiable, and safely transferable. No such asset has ever existed before the invention of the cryptocurrency.
If Russia had succeeded in invading Ukraine then the balances inside Ukrainian banks would have been effectively theirs — that’s the nature of inside money. And it would have been almost impossible for a fleeing Ukrainian government hoping to rule in exile to take their national gold stock with them — they just lost a war!
But they could have taken their crypto and started spending it immediately, there’s virtually nothing an invading army could have done to stop them.
More importantly, the same would be true for individual Ukrainians. Or Venezuelans. Or Iranian dissidents. Or Afghan women. Or Nigerian protestors. It’s also true for corporations and NGOs who want to hedge their exposure to a global banking system that is increasingly polarizing.
And it’s also true for “rogue nations” and terror groups. Does that somehow disqualify Bitcoin? I don’t think so. Rogue nations and terror groups also use the internet, smartphones, and the English language. The fact that we can put Bitcoin in a similar category is an indication of its success.
Bitcoin is digital outside money. It can be transferred instantly from any place on the planet to any other with no censorship. It might not be a flight to quality asset in the naive sense, but it is an asset of the highest quality to those who need it.
Given the direction the world is heading in, that might someday be most of us.
Bitcoin is money insurance, a designation that ironically disqualifies it for day to day adoption. I’m perfectly fine with that. The best insurance is the kind you never use.
Not investment advice. I own Bitcoin. And hope to never have to spend it.
