Discover why Bitcoin continues to function during times of instability, making it an attractive and resilient asset.
What does it indicate about how we feel about risky assets like bitcoin when safe investments like bonds and shares perform poorly?
Thankfully, Maslow’s Hierarchy of Needs, the triangle we learned in school that defines human flourishing, rarely comes up. We don’t consider it until a basic need isn’t supplied. Food, relaxation, and shelter are essential. Safety follows. Belonging and self-esteem follow full potential. (I know that many academics disagree with the premise and that Maslow never actually drew a triangle, but bear with me as I sketch out this construct.)
Some of you may have noticed that the “trust” layer is not its own layer. One may contend that it is a must for every layer since you need to have faith in the safety of your home, your food, and the uplift that a friendship will bring. But “safety,” the layer with which it is most entwined, is where I will make the case that it belongs. Trust is a fundamental element of pretty much anything that suggests advancement, both personally and civilizationally. It signifies belief in the safety to feel and act.
Therefore, safety is important for trust (which is meaningless if there is no belief in it), and trust is necessary for safety (it’s difficult to trust anything without basic reassurances). What transpires when our definition of “safety” begins to shift?
What is and isn’t safe in the financial world is beginning to shift. Let’s examine the recent performance of “safe, sensible investments.”
The market’s safest investments are U.S. government bonds, which are unlikely to default. However, volatility reached its highest level since the 2008 Great Financial Crisis earlier this month. The fastest rate hikes since the 1980s have increased interest rate risk. Even as bond values have fallen, insurance against a U.S. government default has reached its highest level in over ten years. That’s risky.
Stocks, what about them?
Despite being listed as one of the riskiest assets, they have historically moved up and to the right. The S&P 500 and an index of long-term government bonds are shown in the chart below. Which do you think is safer?
Diversification is said to increase return distribution. When we look closer, high-risk tech stocks dominate the top six market cap positions and make up 30% of the S&P 500. That sounds narrower and riskier.
Anyone who has worked with a financial adviser has heard of the 60/40 portfolio, which uses a stock/bond distribution to achieve a more balanced return. The typical 60/40 portfolio lost 18% nominally last year, close to the S&P 500’s loss. Not safe.
Safe homes, right? However, last week’s data showed that US property prices fell 0.2% in January and 3% in June. Because a family’s first investment is often a home, those percentages significant notwithstanding last year’s equity price decrease. The house appears to be standing and offering shelter.
Gold was one of the first “safe havens” due to its strength, liquid market, and unmanipulable supply. However, we cannot always be sure that what we have is gold, and it is hard to store and keep from powerful people. Even if we knew the bars supporting paper gold were real, they could be seized. Our gold may be worthless, however unlikely. That’s risky.
Avoiding securities markets and storing money in a bank account is the “safest” option. Despite official assurances that the U.S. financial system is “strong and resilient,” depositors remain concerned, albeit withdrawals have slowed. However, digital banking can change in minutes, so all deposits may not be safe.
There is also bitcoin (BTC)
It is claimed to be neither safe nor safe at all, but rather “dangerous.” Despite the failures and disappointments of the previous year, bitcoin continued to function. While the price fell, bitcoin continued operating as usual. In times of instability, many people fleeing their homes and/or worried about being cut off from conventional payment rails would find an asset that is tough to confiscate but easy to shift to sound deliciously safe. And verifying it is simple.
Thus, a cultural shift is making us ask why it matters since “safe” can mean returns, continuity, or independence. Even before the COVID-19 epidemic, faith in institutions was declining, and global political instability has left many people less confident that governments will provide safety, especially if, as we often reminded, the globe is in crisis.
“Gamified” investing rewards decisions with confetti or social credit. When the future that young people are expected to secure appears grim, fun takes precedence over safety.
In addition, there is growing interest in a novel asset that operates outside the traditional framework and underlines the growing desire for autonomy, horizontal community, and skepticism of the authorities.
All of this speaks to the inevitable realization that cryptocurrencies like bitcoin and its contemporaries are much more than just “risky” investment vehicles. They signify a change in investment philosophy that appeals to a generation of investors who are becoming more independent. They also stand for political and cultural changes that reduce the authority of authorities trying to impose outdated safety regulations.
Trust and safety are connected, as Maslow’s pyramid shows. Thus, the investing framework’s adjustments go beyond portfolio allocations. They also address major social changes and the idea that breaking tradition might make a society more adaptive and resilient. Retreating from the novel makes one vulnerable.