Bitcoin and the New Definition of “Safe Investment” — CoinDesk

Fortunately, we rarely need to think about Maslow’s hierarchy of needs, the triangle we saw in school that sets out the most important human requirements for flourishing. Until, that is, one of the needs towards the bottom is not met, and then we think about it a lot.

To summarize: At the very bottom we have the basics of survival: the physical needs of nourishment, rest and shelter, and then layered on top of that is safety. The next part of the stack is the psychological need for belonging and self-esteem, and then we come to the top of the pyramid, which is about achieving one’s full potential. (I know many academics disagree with the premise and that Maslow never actually drew a triangle, but bear with me as I outline this construct.)

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is an excerpt from her Crypto is macro now newsletter, which focuses on the overlap between the changing crypto and macro landscape. These opinions are hers and nothing she writes should be taken as investment advice.

Some of you may notice that there isn’t a separate layer for “trust”. One could argue that it’s a prerequisite for every team that you have to trust that the food you eat won’t kill you, your house won’t be blown away and a friendship will lift you up. But the layer with which it is most intertwined is “security”, and I would argue that it is wedged into that category. Trust involves belief in the safety of feeling and acting, and is a core component of pretty much everything that involves both personal and civilizational progress.

So trust is necessary for certainty (which is meaningless if there is no belief in it) and certainty is necessary for trust (without basic assurances it is difficult to trust anything). What happens when our beliefs about what “security” is begin to change?

In the financial world, what is and isn’t safe is starting to change. Let’s take a look at how “safe, sound investments” have performed recently.

US Treasuries are supposedly the safest assets in the market, in that the US government is not going to default on its debt (right?). However, their volatility earlier this month reached its highest level since the Great Financial Crisis of 2008. Over the past year, with the fastest rise in interest rates since the 1980s, interest rate risk has been higher than ever. Bond values ​​have fallen, all while the cost of insuring against a US government default on its debt has risen to its highest level in over 10 years. It doesn’t seem that safe.

What about stocks? We are told they are among the riskiest assets, but over a long time frame they have been up and to the right. The chart below shows the S&P 500 along with an index of long-term government bonds. Which one looks safer to you?

Then there’s the wisdom of diversification – mimic the major indexes, we’re told, and your returns will be better spread. Only if we look deeper do we see that high-risk tech stocks account for nearly 30% of the S&P 500 and occupy the top six spots in market capitalization. It sounds more concentrated than diversified, which certainly brings risk.

Anyone who has interacted with a professional advisor will have heard of the 60/40 portfolio, which relies on a prescribed stock/bond allocation to deliver a more balanced return than focusing on just one or the other asset class. Still, last year the typical 60/40 portfolio lost 18% on a nominal basis, pretty close to the damage done by the S&P 500 alone. Not so safe.

Houses must be safe, right? Ah, wait – data released last week show US home prices falling, down 0.2% in January from December and down 3% from last June. These percentages may seem small compared to last year’s fall in shares, but since housing is often a family’s most important investment, these falls can be damaging. Nevertheless, the house presumably still stands and offers safety as a shelter.

Gold is one of the oldest “safe havens” known to man, a durable metal with a liquid market and (in theory) supply that cannot be manipulated. But we can’t always be sure that what we have is actually gold, and it’s complicated to store and keep out of the hands of people stronger than ourselves. Paper gold is more convenient, but even if we could be sure that the bars behind it were real, these bars are subject to seizure. Although unlikely, the value of our gold holdings could be zero. That doesn’t sound particularly safe.

Of course, the “safest” thing to do is to avoid the stock markets and keep your money in your bank account. Despite official protestations that the US banking system is “strong and resilient”, depositors remain nervous – although outflows appear to have slowed for now. But the digital nature of the bank means that can change within minutes, and it is not yet certain that all deposits will be protected.

Then there is bitcoin (BTC). We are told that it is not safe at all, we are even told that it is “dangerous”. And yet through the past year of crashes and disappointments, bitcoin continued to work. The price plummeted, but bitcoin didn’t miss a beat. Also, in times of turmoil, an asset that is difficult to seize but easy to transport will sound refreshingly safe to many fleeing their homes and/or worried about being shut out of traditional payment rails. And it is trivial to verify.

So, just as we are beginning to realize that it is time to re-examine what “safe” means, whether it refers to return, continuity or independence, we have a cultural shift that asks us to question why at all means something. Even before the COVID-19 pandemic, trust in institutions had declined, and the increasing political polarization seen around the world is eroding trust for many that governments will offer protection, especially if – as we are regularly reminded – the planet is in trouble regardless.

Plus, there’s the “gamification” of investing, which rewards decisions with screen-filled confetti or at least some social kudos. Fun generally trumps safety, especially when the future that young people are saving for looks ever darker through their eyes.

Added to this is a growing interest in a new type of asset that operates completely outside the establishment system and which highlights the growing desire for independence, horizontal community and skepticism about the authorities’ good intentions.

All of this points to an inevitable realization that bitcoin and its ilk represent much more than a “risky” investment asset. They represent a shift in investment philosophy that speaks to an increasingly independent generation of investors. They also represent cultural and political changes that weaken the power of authorities that try to invoke security rules that no longer make sense.

Return to Maslow’s pyramid where trust and security are intertwined: if one changes, so does the other. That is why the changes in the investment frameworks we see are about much more than portfolio allocations. They are also about larger social changes and the recognition that while wisdom is built up over generations and shouldn’t be thrown out the window just because it’s ‘traditional’, questioning convention helps a culture become more flexible and resilient. A refuge from the new increases fragility – not very safe at all.