💰 Why Isn’t Digital Gold a Risk-Off Asset?

Here’s a Reuters headline from Friday: Gold surges as Middle East tensions spur safe-haven rush.

Here’s a Wall Street Journal headline from Saturday: Digital gold falls as investors turn risk-averse after drone launch.

Weird, right?

Why would the two forms of gold — analog and digital — go in different directions on the same news event?

OK, fine — I’ve taken some newsletter privileges with that second headline.

The WSJ headline read “Bitcoin” not “Digital Gold.” 

But to most bitcoin holders (including those who sold this weekend, presumably) “bitcoin” and “digital gold” are as interchangeable as “stocks” and “equities,” “bonds” and “fixed income,” and “hot dogs” and “frankfurters.”

So shouldn’t they have been buying bitcoin this weekend?

That would seem more logically consistent to me, because bitcoin is a pessimistic asset.

Unlike stocks, which most people own with the implied assumption that the world is likely to get better, most people own bitcoin because they think the world is likely to get worse — be it because of hyperinflation, collapsing rule of law or, most hopefully, a reversion to a barter-based economy.

And yet, when the world gets demonstrably worse, as it did this weekend, we bitcoin holders lose money.

This seems unfair! 

Particularly so given the growing institutional acceptance of Bitcoin as a hedge against things getting worse.

Former PIMCO CEO Mohamed El-Erian recently told CNBC that people increasingly view bitcoin as “the safe asset” mostly because “they’ve lost confidence in government bonds.”

One of those people happens to be the second-most powerful person in finance.

In October, BlackRock CEO Larry Fink told Fox News that people were buying bitcoin in “a flight to quality” because of “all the issues around the Israeli war.”

So why would bitcoin go up on war in October and go down on war in April?

It might be because, in October, Fink was speaking to Fox News on a weekday, when investors could react to the news from Israel by selling their riskiest asset — stocks.

This time around, however, the headlines hit on the weekend and the only thing you can sell on weekends is crypto.

The WSJ story from this Saturday explained that bitcoin “is considered to be a riskier asset to hold and is therefore one of the first sold when investors get nervous.”

But I’m not sure we sold bitcoin this weekend because bitcoin is risky — I think we sold it because headlines about war in the Middle East make us want to sell something and we sold the only thing we could, which was bitcoin.

True bitcoiners, of course, agree with Larry Fink that bitcoin is a safe-haven asset and should therefore be bought when things get scary, like we do with gold and US Treasurys.

But when people execute a flight to safety by buying gold or Treasurys, they are usually using money they raised by selling stocks to do so.

That doesn’t work for bitcoin on nights and weekends when everything else is closed. 

Yes, you could technically “sell” some of the US dollars that you have in a Coinbase account to buy bitcoin.

But 1) you probably don’t have any dollars in your Coinbase account because you’ve already used them all to buy crypto and 2) that doesn’t feel like selling, it feels like buying. And when you’re feeling anxious, you don’t want to buy — you want to sell.

So you sell bitcoin.

These are just feelings, of course, and feelings can change — there might come a day when holding bitcoin makes us feel safer than holding US dollars.

But the current narrative that bitcoin is a risk-on asset is creating expectations that bitcoin will go down on scary geopolitical news. And those expectations are creating the reality that bitcoin is a risk-on asset that goes down on scary geopolitical news.

Which is to say, bitcoin is a risk-on asset not because it's inherently risky — it’s a risk-on asset because it's the only thing that’s always available to sell when we’re feeling anxious.

So here’s my weekend headline: Anxious investors sell what they can — bitcoin.

― Byron Gilliam

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Solana: State Of The Network

In this roundup, Santi and Jason dive into the implications of Uniswap receiving a Wells notice from the SEC and the departure drama at MarginFi.

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