Cryptocurrencies would be having a good week no matter who was elected, since they rise and fall with the market — but that means they’re not a good hedge against the economy collapsing.
I think I finally understand value of cryptocurrencies: They add some volatility to your portfolio. Maybe that’s why they have found such a champion in Donald Trump, who if nothing else adds some volatility to our politics.
And yet — I will not push the analogy between the president-elect and cryptocurrency any further — this volatility also exposes the central contradiction of crypto, which has hit record highs in the week since Trump was elected. Crypto is supposed to be an alternative to government currencies, a safe refuge if the global financial system collapses. But its history suggests it just makes your portfolio more risky. It’s not possible for something to both add risk and provide safety.
Crypto has been around for only about 15 years, which is not much time in financial markets in general and certainly not enough time to make a definitive inference about its pricing behavior. That said, a pattern is emerging: Crypto currencies have a very high beta, a measure of an asset’s volatility, and they are very correlated with the overall stock market. When the market is up, they are up even more. When it falls, so does crypto — even more.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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