Exter’s pyramid is a an excellent way to visualize the risk of asset classes in relation to their size. At the top of the pyramid is derivatives, at the bottom you have our favorite asset, gold. Between those two boundaries you have non monetary commodities, bonds, stocks, and paper cash. My question is, where does Bitcoin fall on Exter’s pyramid?
To make this easy, we can think about this in two ways then revisit the topic later on as Bitcoin matures in the marketplace. First, let’s assume that due to the risky nature of Bitcoin it lies at the top of the inverted pyramid. Said differently, Bitcoin is the most risky of all assets due to it being the new kid on the block and its proclivity for being hacked.
Taking the other side of the coin here, let’s say that Bitcoin falls right above, or equal to gold, the least risky of all assets. After all, many people classify Bitcoin as digital gold given the economics of the digital currency. New kid on the block and hacking risk be damned, this argument says that Bitcoin is actually one of the safest assets of all.
When choosing between these two polarizing opinions, I am of the belief that Bitcoin lies closer to the bottom of the pyramid (gold) than most might think. It is an innovative software program that accounts for inflation and enables it’s users to transcend borders, cultures, and middle men. To me, there is a lot of value there especially when you are thinking about risk. What could be less risky than a currency and protocol governed by mathematics and beholden to no central powers? Sounds a lot like gold for the internet age…
In conclusion, we don’t know where Bitcoin lies on Exter’s pyramid and only time will tell. Nonetheless, if you look at the “raw materials” of Bitcoin it is much like an internet version of gold. Therefore, in the digital age, it’s safe to safe that Bitcoin will be a flight to safety when the music stops in the capital markets.