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In a Real War Can Virtual Assets be a Haven?

The grinding civil war in Syria, already a fierce proxy battle between the U.S., Russia, NATO allies, Turkey, Israel, Iran and Isis, has entered a new and perilous stage with this weekend’s reprisals to Bashir al-Assad’s use of chemical weapons. A U.S.-led coalition, backed by military assets from France and the UK, positioned a flotilla in the Mediterranean, launching sorties of aircraft and Tomahawk cruise missiles delivering targeted strikes destroying Assad’s suspected chemical weapons facilities. With these strikes, Western powers aim to redraw bright redlines in Syria and remind the world on conventions in warfare that preclude the use of nuclear, chemical and biological weapons. Markets were already skittish as this wave of military action was – in contravention to military norms – telegraphed on Twitter by President Trump, who warned Russia and Assad that “smart” missiles were coming. Surely, when markets reopen on Monday an already volatile global economy will seek havens from the likelihood of a widening conflict, in the real and virtual military theaters, or an all-out conflagration between great powers.

António Gueterres, the UN’s Secretary General, has recently warned of a return of Cold War norms between the West and Russia. While the likelihood of direct military action remains mercifully low, the recent escalation in Syria not only keeps markets on edge, it keeps the world very much on course for serious unintended consequences. From these consequences, many large asset owners, such as hedge funds, pension funds, insurers and companies, are at once too big too fail and too big too hide from the long arms of market volatility and risk. Indeed, if the West is engaged in another Cold War, a hot conflict is already raging in cyber space (or in military parlance the fifth domain), where a continued barrage of salvos are being fired at critical infrastructure, cities, like Atlanta’s recent ransomware woes, trading markets, individual firms and elections. Following the airstrikes in Syria, which the U.S. and its allies have committed to maintaining if chemical weapons are used again, it is very likely Russia and its highly effective cyber battalions will ratchet up their virtual attacks. Trust in democratic institutions and in corporate custodianship of privacy, data and money are already collateral damage of the age of cyberwarfare.

Against this complex and interconnected backdrop, can cryptocurrencies offer a pathway to uncorrelated returns and potential safety as the real economy faces the specter of going haywire? Bill Gates sees glowing embers on the horizon signaling the likely return of a 2008-style financial meltdown. Many cryptocurrency investors, like Venezuela’s recent issuance of an oil-backed cryptocurrency, the Petro, like the asset class precisely because it is beyond the reach of nation-states, regulators and their economic ructions. Indeed, where struggling countries like Venezuela and rogue regimes like North Korea see paths to circumvention of economic sanctions and domestic struggles, legitimate investors (much like the people of Venezuela) may very well turn to virtual assets, like Bitcoin, as a haven from the consequences of the real world. Not least of which is the growing prospect of war, economic sanctions, cyber-attacks, among others. One key point of distinction between centrally-issued fiat cryptocurrencies, like the Petro, which was launched out of desperation and is already facing serious critiques and attempted sanctions, and truly decentralized digital assets, like Bitcoin, is the concept of self-sovereignty. In short, Bitcoin is not a part of the economic arsenal of any country, making it an appealing asset for people who want to diversify away from country risk.

Although this may seem counterintuitive, one thing cryptocurrencies have going for them in turbulent times is the highest implied volatility of any asset class. Therefore, the veteran cryptocurrency investor, one who has grown accustomed to swimming against the currents, will be less likely to flinch in periods of heightened risk. Clearly, this potential advantage is weighed down by the generally illiquid nature of cryptocurrencies, which in effect, are a form of a bartering or an exchange of value. Their inherent price is borne, in no small measure, out of their implied scarcity and utility, with Bitcoin’s total circulation of 21 million, of which 80% have been mined or discovered. The value of cryptocurrencies during times of war or economic sanctions, where the traditional economy will likely retrench as investors attempt to fly to safety, is that they offer efficient alternatives for trade, capital flows and value transfer between trusted counterparties – provided internet connectivity is not disrupted and people do not fall prey to cyber threats of their own, from the mundane like forgetfulness to the severe like cyber-attacks. For these and other reasons, the value of cryptocurrencies like Bitcoin will likely appreciate as diplomatic, economic and military ructions continue to escalate.

The jury, market and global regulators are still adjourned on whether cryptocurrencies are an asset, collectible, currency (in the true meaning of the word) or a commodity, with the U.S. Commodity Futures Trading Commission (CFTC) somewhat self-servingly arguing for the latter. Perhaps, precisely because cryptocurrencies defy categorization and require the suspension of disbelief, their inherent strength as an asset class is that they can be all of the above and much more, which makes them a compelling hedge against complex risks. Traditional financial risks grow in likelihood during times of conflict, including capital controls, currency inconvertibility, asset seizures among others. Just as gold emerged as a tangible and safe asset during times of conflict, digital assets may very well offer a similar reprieve provided investors proceed with caution. As with all investments, diversification is the key to stable returns and combating risk. The advent of cryptocurrencies offers yet another pathway to diversification.

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