Courtesy of Matt Sauer, MFSWNB Investments:
Recently a CNBC host interviewed a money manager and pronounced that Bitcoin is not a currency and he made the statement that he does like the use of the word cryptocurrency. The host’s point was that Bitcoin was too volatile to be a currency. Ignoring the fact that many currencies have collapsed throughout history, the host took issue with the volatility of Bitcoin.
Is Bitcoin an asset has suggested by the host, or is it a currency? As we have previously written, it depends. We believe that we can further our liquid, gas and solid analogy by describing assets on a spectrum. Imagine there is a spectrum of assets where the descriptive variable is how much the asset depends on the dollar for its valuation. Treasury bonds are at one end of the spectrum with cryptocurrencies at the other. In between, there are assets such as dry cleaners only interacting with dollars to multinational corporations earning various currencies around the world. Additionally, the types of assets have different characteristics, an offshore oil well acts differently to a severe change in the dollar’s valuation than a carpet manufacturer using the increasingly higher priced oil as an input.
Bitcoin does not rely on dollar denominated cash flows or assets for its being. This is different from its relationship to the dollar in terms of pricing versus the dollar but that is why it has currency qualities. While the host was focused on volatility of price, his conclusion that currencies do not have large moves suggests a short time frame with large heavily traded sovereign issued fiat currencies. There may come a day when no one defines them as currency when the printing of paper becomes an exercise in portraits of dead presidents rather than a medium of exchange.
The dollar’s role as a reserve currency makes a significant devaluation even a greater threat to the global economy. Various counties have had their currencies significantly devalue without much spillover effect; it will be different with the dollar. As the reserve currency in the central banks of the emerging markets, the dollar will significantly impact those currencies as well. While the collapse of the Venezuelan currency could have been significantly hedged by owning almost any other currency or an asset denominated in such currency, a significant devaluation of the dollar makes all of the fiat currencies suspect and the emerging market currencies worthless.
Returning to the spectrum, we wish to review the same spectrum after a significant devaluation in the dollar. The correlation to the dollar with other global currencies pushes the multinational companies much closer to the position of Treasury bonds, the dry cleaner is already adjacent in placement to them. There continues to be a shift of all assets except cryptocurrency to the dollar side of the continuum as fortunes correlated to the dollar contract in value sharply.
On the far-right side of the continuum sits cryptocurrencies. Their name and value intact.