Is bitcoin a safe asset? David Andolfatto, vice president of the Federal Reserve Bank of St. Louis, acknowledges in his blog, “ MacroMania ,” that bitcoin can be volatile over a short time span. But when people speak about safe assets, it’s not the same as providing a stable rate of return.
Andolfatto, in considering what makes an asset truly safe, thinks bitcoin does have some important safety properties to consider, either for personal investing or policymaking. What’s A Safe Asset?
A safe asset is one people go to during uncertain economic times. In normal times, a safe asset is one that people hold despite a low return rate, possibly due to its use as a hedge, or liquidity characteristics.
Many view U.S. Treasuries (UST) and U.S. dollars as safe since they are fairly risk-free in their nominal return rate. A USD gives a zero nominal interest rate. A UST also gives a zero nominal interest rate along with full principal payment upon maturity.
Andolfatto points out that there’s more to thinking about a security’s risk. Investors don’t care how many paper dollars they are promised in the future. They care about the purchasing power those dollars will bring. Inflation can cut purchasing power or build it depending on inflation. Consider U.S. Treasuries
The UST bill’s market price generally fluctuates from the issue date to maturity. Buy a bill promising $100 a year from now for $99 and you make close to 1% holding it till maturity. But if interest rates rise before then, you’re likely to suffer a loss if you have to sell the bill to raise cash.
The return on a safe asset can appear stable over long time periods, but in the interim, something could happen. Interest rates can rise and a sudden bond sell-off can occur. There […]
