Bitcoin as a Risk-Off Asset: Navigating Global Financial Instability

Briefing Notes

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Summary

The September 30, 2024 episode of the Wakeup Call podcast by Onramp Media features Ralph Gebran, Managing Partner of Onramp MENA, who joins Mark Connors and Rich Kerr to discuss Bitcoin’s growing role as a risk-off asset in an increasingly unstable global financial environment. The conversation touches on Bitcoin’s potential as a hedge against inflation, custodial risks in centralized systems like ETFs, and the promise of multi-institution custody. With a focus on the Middle East and North Africa (MENA) region, the episode emphasizes Bitcoin’s role as both an investment vehicle and a financial lifeline in politically and economically volatile areas.

Take-Home Messages

1. Bitcoin is increasingly recognized as a risk-off asset: Particularly in regions facing geopolitical or economic instability, Bitcoin provides a hedge against systemic risks that traditional assets cannot.
2. Institutional adoption of Bitcoin is growing: Major financial institutions, including BlackRock, are exploring Bitcoin as a portfolio diversifier, but custodial risks are a key area of concern that must be addressed.
3. Centralized custody poses significant risks to Bitcoin’s core values: Custodial concentration in ETFs creates counterparty risks, and centralization undermines Bitcoin’s decentralized ethos.
4. Multi-institution custody offers a solution: By spreading Bitcoin custody across multiple institutions, investors can reduce counterparty risk and better protect their holdings.
5. Bitcoin adoption is accelerating in politically and economically unstable regions: In countries experiencing hyperinflation or capital controls, Bitcoin provides a financial lifeline, granting individuals more financial autonomy.

Overview

In this episode of Wake Up Call, Ralph Gebran, Managing Partner at Onramp MENA, provides a deep dive into the growing use of Bitcoin as a risk-off asset. The conversation opens with Mark Connors and Rich Kerr discussing China’s economic stimulus, comparing it to the 2008 financial crisis, and linking it to global inflation and currency debasement concerns. The group emphasizes Bitcoin’s potential to serve as a hedge against such systemic risks.

Ralph provides valuable insights from the MENA region, noting that while Bitcoin adoption is still in its infancy, it is rapidly gaining traction, especially in areas suffering from hyperinflation and capital controls. He points out that while Bitcoin is viewed as volatile in stable regions, it provides financial autonomy and stability in regions facing economic or political turmoil. This distinction illustrates the varying use cases of Bitcoin based on the context in which it is adopted.

The discussion also focuses on institutional interest in Bitcoin, highlighted by BlackRock’s recent report describing Bitcoin as a unique portfolio diversifier. However, Ralph critiques the report for overlooking the custodial risks associated with centralized Bitcoin custody, particularly in ETF structures. He argues that multi-institution custody, which distributes counterparty risk across several custodians, is the key to ensuring secure Bitcoin holdings for both institutional and retail investors.

Stakeholder Perspectives

• Institutional Investors: Concerned with Bitcoin’s volatility, institutional investors are nonetheless drawn to its potential as a hedge against global instability. However, the custodial risks of centralized solutions like ETFs remain a significant barrier.
• Retail Investors: Retail investors are increasingly interested in Bitcoin as a hedge against inflation and economic instability but often lack the knowledge or infrastructure to securely manage their Bitcoin holdings.
• Regulators and Policymakers: Governments in regions with economic instability may be concerned with Bitcoin’s potential to circumvent capital controls. In contrast, policymakers in stable regions may focus on creating a regulatory framework for Bitcoin ETFs and custodial services.
• High-Net-Worth Individuals: Wealthy individuals are looking to Bitcoin as an alternative investment vehicle, but they require secure custody solutions, such as multi-institution custody, that mitigate the risks of self-custody or centralized custody.

Implications

The issues discussed in this podcast have significant implications for policymakers, financial institutions, and investors. First, the increasing adoption of Bitcoin as a hedge against inflation and currency debasement indicates a shift in how traditional markets view Bitcoin. This will likely lead to more financial products centered on Bitcoin, such as ETFs, but also raises concerns about the risks associated with centralized custody.

For investors, the conversation underscores the importance of understanding Bitcoin’s unique risk profile. While Bitcoin offers protection against systemic risks in politically or economically unstable regions, its volatility remains a challenge in day-to-day transactions. The development of more stable and decentralized custody solutions, such as multi-institution custody, is critical to mitigating these risks.

Policymakers will need to consider the regulatory implications of Bitcoin’s growing role in both stable and unstable economies. In regions where Bitcoin serves as a financial lifeline, efforts to restrict its use could undermine the financial autonomy of individuals. Conversely, in regions where Bitcoin is primarily viewed as an investment, regulations around custody and centralized custodianship will be a key focus.

Future Outlook

Bitcoin’s adoption as a risk-off asset will continue to expand, particularly in regions with high levels of political or economic instability. The MENA region is emerging as a critical area for Bitcoin adoption, driven by both economic necessity and the alignment of Bitcoin with Islamic finance principles. However, for institutional investors to fully embrace Bitcoin, solutions like multi-institution custody need to become more widely available, providing a secure and scalable way to hold Bitcoin.

The shift toward decentralized custody solutions is likely to accelerate as more institutions and high-net-worth individuals seek to protect their Bitcoin holdings from centralized risks. At the same time, policymakers and regulators will need to strike a balance between protecting investors and fostering the innovation required to support Bitcoin’s unique custody requirements.

Information Gaps

1. How does Bitcoin's risk-off profile compare to traditional safe-haven assets like gold during geopolitical crises? Understanding how Bitcoin performs in comparison to established assets like gold will help investors and policymakers evaluate its role as a risk-off asset. This question is particularly relevant for institutional investors seeking portfolio diversification.
2. What impact does Bitcoin adoption have on countries facing currency debasement and rising inflation? The answer to this question would provide valuable insights into how Bitcoin could serve as a tool for financial stability in countries experiencing economic turmoil. This knowledge could shape future monetary policies and adoption strategies.
3. What are the long-term risks of centralizing Bitcoin custody under a single entity, and how can this be avoided? Given the systemic risks associated with centralized custody, especially in ETF structures, this question addresses a critical gap in current risk models. Answering it could lead to more secure, decentralized custody solutions.
4. How can multi-institution custody systems improve security and reduce counterparty risk for Bitcoin investors? This question is essential for creating scalable custody solutions that appeal to both institutional and retail investors. It explores the benefits of decentralization and how multi-institution systems can mitigate the risks inherent in centralized custody.
5. How can Islamic finance principles be integrated with Bitcoin’s decentralized framework to encourage wider adoption in the MENA region? This question has significant cultural and economic implications for expanding Bitcoin’s reach in the MENA region, where Islamic finance principles play a major role in financial decision-making.

Broader Implications

Bitcoin as a Hedge Against Global Instability

In regions experiencing political and economic instability, Bitcoin serves as a financial lifeline, offering protection against hyperinflation, currency debasement, and capital controls. As global financial markets become increasingly interconnected, the demand for assets that can function independently of traditional monetary systems will grow, positioning Bitcoin as a critical hedge. This trend could accelerate Bitcoin’s global adoption, particularly in regions vulnerable to economic collapse or authoritarian financial control.

Multi-Institution Custody as a Scalable Solution

The rise of multi-institution custody is likely to become a critical innovation in ensuring Bitcoin’s scalability for institutional and retail investors alike. This model reduces the risks associated with centralized custody, providing a distributed network of trust that aligns with Bitcoin’s decentralized ethos. As more institutions recognize the need to secure their holdings without relying on a single entity, multi-institution custody solutions could become the industry standard, driving broader adoption.

Geopolitical and Economic Factors Driving Adoption

Bitcoin’s role in offering financial autonomy becomes particularly relevant in regions affected by geopolitical unrest, such as the MENA. As countries in these regions face hyperinflation, economic sanctions, and capital controls, Bitcoin provides an alternative means for wealth preservation and cross-border transfers. This presents a unique opportunity for Bitcoin to grow in importance in regions where traditional financial systems are unreliable or authoritarian.

Institutional Models and Custody Innovations

As more financial institutions adopt Bitcoin, there will be an increasing need for innovative custody models that can secure large-scale holdings while minimizing risks. Traditional custody methods, such as those used for stocks or bonds, are inadequate for managing decentralized assets like Bitcoin. The future of Bitcoin custody may involve a hybrid approach, combining decentralized solutions with institutional-grade security to balance accessibility and security for all users.