A hedge of protection.
There are two types of risk; non systematic and systematic risk; I will give examples of both to make this easy to understand.
Non-systematic risk: Enron was a major tech company in the late 90’s but fraud took place and the whole entire company went belly up in 2001. If you had a significant portion of your wealth in Enron stock you would have lost a lot of money. However, if your stock portfolio was well diversified into a number of different industries and you didn’t own Enron stock (or at least not a whole of Enron stock) you would not have experienced any major losses. So non-systematic risk is a risk that a particular investment you own loses value.
Systematic risk: This is when a whole market loses; an obvious example is the 2008 Recession. It really didn’t matter which stocks you owned during 2008; everyone lost money. This is because there was systematic failure. Systematic risk is a risk that a whole market will lose value.
Avoiding non-systematic risk is relatively easy; don’t put all of your eggs into a single basket. If you use traditional diversification and own a variety of different stock market funds you should avoid having all your eggs in the next “Enron basket”. The real difficulty is getting away from systematic risk in our increasingly interconnected world. What starts as a failure in the housing market quickly leads to a domino effect that takes everything else down with it.
Many Bitcoin holders including myself think that Bitcoin may be hedge against systematic risk of our global market system.
Why?
Most markets and investments are deeply tied to the performance of governments, banks and large corporations. As Peter Lynch said “Invest in businesses any idiot could run because someday one will”. The problem is that somethings can’t be ran by idiots but eventually are. How long can a nation have idiot leaders without bankrupting the country? How long can central banks overprint money without ruining a currency? How long can businesses run without making a profit before we should just consider them zombie companies? In today’s interconnected world a handful of idiots can take the whole thing down.
Bitcoin has three main advantages over traditional markets.
- It’s not tied to a government.
- It’s not tied to a business.
- It’s not tied to a bank.
In other words, it’s disconnected from the traditional financial markets. In practice, it’s more similar to gold than it is to any other asset. Many people have used gold for a long time as a hedge against systematic market risk and Bitcoin can do the same thing. Bitcoin has also performed better than gold over the last decade and has many built in advantages that you should read about here.
Because I do think Bitcoin is a hedge against systematic market failure I do think it’s a good idea to own atleast a little bit.
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