 It could be that we're already in a recession. It's unlikely that these cryptos are safe haven assets. They're not hedge assets. Hey guys, I'm happy to present to you the full interview that was featured in our latest documentary Inside China. What the coronavirus reveals about crypto. Make sure you check it out and now let's get to the interview. What's up YouTube, my name is Jackson. Today I have the pleasure of welcoming back Professor Campbell Harvey, the inventor of the yield curve signal. Last time we talked about how Bitcoin could potentially be a safe haven but apparently something has changed and I'm excited to find out what that is. How's it going today Professor? I'm doing well, thank you. In our previous interview, the conflict between Iran and the US sparked a discussion about why Bitcoin could potentially be a safe haven asset. One of the key points was that it has no intrinsic value or fundamentals and therefore is relatively independent from the traditional financial system. On the other hand, Bitcoin is highly volatile and so far there hasn't been enough historical data to show how Bitcoin behaves during an economic crisis. You wrote to me yesterday to tell me that the recent price action in the Bitcoin and stock markets is moving your opinion in a certain direction. What's changed? Well, again, cryptocurrencies are very difficult to value. A stock is relatively easy to value. You've got forecasted earnings, you've got some degree of risk that you discount those earnings by and you get a stock price. A bond, also very simple. You've got a coupon, you've got principal and you basically got the risk of the bond and you've got a price but things like Bitcoin and Ethereum are really difficult to think about because there's no fundamental. There's value, obviously, to the network. People value these cryptocurrencies for transactional purposes, for speculation but it's really difficult to think about the value and when you start talking about safe haven, it becomes really difficult to think are these really safe haven assets because it's just not obvious and we don't have the history to actually look at it but as the history kind of expands, anytime you've got a big move in the market that is the lens that you need to try to figure out what happens to other asset prices and interestingly, it turns out that the cryptos were not a safe haven in this latest episode. So in which direction is that moving your opinion? So you see this as a way of saying that no, no, no, no, these are not a good place to put your money if the economy is going down. Is that correct? Yeah, so again, you think about like a stock and if the economy is going to go into recession, that's bad for the earnings of a company. So it kind of makes sense that the stock price goes down. For a crypto, there's no earnings. So whatever kind of interest in that crypto is likely driven by speculation. So when you've got a situation where we've got what I call a risk off situation where people want to de-risk their portfolios to basically dump risky assets and go into less risky assets or safe assets, what we've seen is that it appears that people are dumping their cryptos and the risk off. And this really suggests that much of the value that's attributed to the cryptos is essentially a speculative value. So of course, as you probably know, the coronavirus is a global potentially crisis that is occurring at this point. How does the ongoing saga of the coronavirus compare to the events of the US-Iran conflict in terms of this Bitcoin as a safe haven narrative? Well, like both of them are what I would consider kind of systemic risks. And obviously a pandemic is a bigger risk in my opinion because whatever will happen with the US and Iran would likely be relatively contained in the Middle East. And also if you look at the series of events of what happened in Iran, US took out a top general, then there was some kind of mild retaliation. That's kind of small stuff compared to a potential global pandemic and it's basically no escape anywhere in the world from something like that. So this is a much larger risk event and we're much further along in the risk event. So maybe it was similar at the beginning of January to the situation in Iran, but we're at the end of February and this is a much bigger event. And in markets responded, this is a big event and what's gonna happen? Well, economic growth will slow almost by construction. And when economic growth slows, that damages the stock market, it damages all risk assets and crypto took a beating as a result. So on January 30th, the World Health Organization declared the coronavirus to be a public health emergency of international concern. I'm declaring a public health emergency of international concern over the global outbreak of novel coronavirus. At that time, Bitcoin's price was around $9,500. As major international media outlets picked up the outbreak and began providing nonstop coverage of the spread of the virus, Bitcoin went on to hit its 2020 high of nearly $10,500 in mid-February. One might think that this was because Bitcoin was performing as a safe haven in a time of fear. However, I was looking at the trend of Bitcoin's price during the past month and it seemed to me that there is a correlation with the trends of the Dow Jones, S&P 500 and NASDAQ in the same timeframe. Would you agree? Well, again, we need to be careful because correlations can shift through time. But you are correct that, again, this COVID-19, basically it evolves in terms of how big of a risk it actually is. And as we went through February, our leaders and investors and regular citizens became aware that this is really the possibility of a global pandemic. So the risk was increasing. And you're right, this is exactly what happened. We saw a major sell-off in the stock market where the prices on consecutive days went down 3%. The total drawdown at this point is more than 7%. That is a substantial move in the stock market. Now, if these cryptos were safe havens, then you would expect maybe no change in their value or maybe even an increase in the value. But that's definitely not what we've seen. The cryptos got battered and dropped by more than 10%. So that suggests to me, in a particular situation of great stress where people are realizing that there's systemic risk unfolding, the stock market drops as expected, people flee to safe assets, but they didn't flee to cryptos. They fled to the US tenure bond. Yeah, exactly. And it's very interesting because Bitcoin has no intrinsic value. It has no connection to the stock market. And yet it's still followed this correlation along with the stock market. Can this tell us anything else about this relationship between Bitcoin and the stock market? Well, what it tells me is that it's unlikely that these cryptos are safe haven assets. They're not hedge assets. So essentially the speculators in the stock market, they need to de-risk. That's what risk off is. They need to de-risk. So they sell the stock market goes down. The same people are similar in terms of motivation. In the crypto complex, they need to sell. They need to de-risk. And that's exactly what we've seen. So it's consistent. And again, we need to be careful here because this is only one episode, but it's an important episode. And I think that we can learn from it. And this episode suggests that Bitcoin, Ethereum, other cryptos are more in the category of risk assets. That means they will move in big systemic events like other risk assets like stocks. Can you just go over one more time why this event in particular is so important? Cause you do mention it's only one episode, but why is it worth paying attention to this one specifically? Yeah. So if you think about what happens from day to day, there's some news here and there. The stock market goes up and down and it's really hard to interpret. It's a mix of information and noise. So it's rare that we actually get a situation where it's really clear. So COVID-19 is a potential pandemic. It's getting worse. Everybody's going to be hit by it to some extent. This is a systemic event. And as a result, people rationally look at this and say, well, GDP is going to take a hit. As a result of that, that means these firms are going to take a hit in terms of their profit. Prices are going to go down. I need to de-risk. So this is an opportunity where you've got a large amount of signal and a small amount of noise. So these are opportunities where we can actually learn about the correlation behavior of assets. It's really hard to learn about the correlation behavior when they're up 0.5% or 0.2% or down 0.3%. That's just noise. These are signal events and we can learn a lot from these signals. So what does that tell us about the type of investor who's invested in Bitcoin and other cryptocurrencies? So we know that there's some extremely long-term investors in crypto that are holding for multiple years and will not be swayed by the daily ups and downs of the crypto volatility. But I think that ever since 2017, there's a large group of investors that are purely looking at a speculative investment. It's a way to bet. And it's a way to bet that's got very high volatility, which is what they're actually looking for. So what we've seen is consistent with the price being driven by speculation rather than long-term investment. Why do you think there's such a large number of speculators in the Bitcoin market? Oh, it's the volatility. So if you invest in the stock market, the annualized volatility is only about 15%. So you invest in Bitcoin, the volatility is more like 90%. So it's possible that in a short period of time, you can double your money. That's not possible investing in stocks. It's not possible investing in commodities like gold. So this gives investors that really want to speculate a large amount of leverage. So I've got a giant upside. So this very attractive for speculators and people just want to take a bet. So according to data analytics provider SKU, on February 26th, over $150 million worth of Bitcoin was liquidated on the trading exchange BitMEX. This was the most seen in 2020 so far. Millions of dollars of long and short positions caused the value of the cryptocurrency to fall to $8,580. It's a crease of more than 6%. How does, what role does this event play in your hypothesis of Bitcoin as a risk asset? Can we attribute Bitcoin's recent drop to this liquidation or do you see this liquidation more as like an investor getting out of Bitcoin because they see it as a risky asset? So it is true that if somebody dumps a large amount of Bitcoin, that that will cause the price to go down. And that's true for any asset, right? If there's a lot of selling, then the price goes down. So this was a particularly big sale and it did have a negative effect on price. But I think that it's only part of what's going on. This, we don't know the exact motivation but it's certainly consistent with a risk off trade. So given that risk is increased, I need to adjust my portfolio. I need to become more conservative. And that means dumping risky assets, stocks and crypto kind of fit that bill. On February 3rd, the Shanghai Composite Index plunged 8% during its worst single day drop in nearly five years. The Chinese government was forced to pump $22 billion worth of yuan into the economy in order to stabilize the stock market. Would you advise someone in China to buy Bitcoin as a way to preserve the value of their money throughout the coronavirus pandemic? Well, number one, I don't give investment advice as an academic. Number two, I think that if you look at the data, it is challenging because we don't have that much data. I've made this point before, that we in the entire history of the crypto prices don't even have a recession, not one recession. So with stocks, we've got the history of recessions back to 1850, but with cryptos, we haven't even gone through one. However, again, I think that we can learn something from these events where there's a realization of risk as we're seeing with the coronavirus situation. And in this situation, stocks have dropped and so have cryptos. So that's inconsistent with putting your money into cryptocurrencies and thinking, well, that will help us write out any correction in the equity market or any recession. So I think it would be very risky to transfer your portfolio to crypto currencies thinking that that will help you hedge. So would you expect Bitcoin to perform similarly in the scenario of a recession, for example, because as you pointed out to me, the yield curve did once again, invert at around February 18th, I think, somewhere around there and has since been inverted this whole time. Would you expect Bitcoin to perform similarly and be correlated to the stock market in this way during a recession? What we've seen recently with the yield curve inversion is consistent with the theoretical framework in my dissertation, that people see a potential pandemic. People see that economic growth is slowing as a result of that and will slow further. And this could actually push us. This could be the trigger that pushes us into a recession. So the yield curve inversion is consistent with that. And in terms of the performance of cryptos during a recession, it completely depends upon how severe that recession actually is. I guess I would speculate that if it's a very severe recession, that would be the type of thing that we're kind of seeing unfold in February that people would want to de-risk their portfolio. And de-racing their portfolio would mean liquidating some of their cryptos. Do you think that a recession will come earlier than you previously predicted due to the arrival of the coronavirus? Yeah, well, that's obviously the coronavirus is not something that the yield curve predicts. That just as an event, we were already in a slowing growth situation and already headed for what might be a mild recession or just a slowdown. So given what we've seen in terms of, in many cities, many countries, where economic activity has basically stopped, so it could be that we're already in a recession. I just wanted to go back for a moment to what you said that we could already be in a recession. Could you just go over again what you think the effects are? What do you think the effects will be of the coronavirus on the global economy? So we've already seen that the coronavirus is taking a toll on economic activity. We see it every day in terms of video, empty streets, empty stores, factories that are effectively shuttered. China is incredibly important in terms of the strength of the world economy. But what's different with this is it's not just a local economic shock in China. It is a shock that's going to be felt throughout the world. And we're seeing other countries like Italy, Korea, Japan all taking a hit as a result of this. So the same problem that's happening in China, other countries are exposed to. We focus on this type of risk and this is the type of risk that leads to decreased economic activity. So this could be the nudge or the push that puts us into a recession. Understood. And just to be clear, given everything we've talked about, you believe that the cryptocurrency market will follow the stock market into that recession, correct? So given what we've seen, where we've had a major correction in the stock market, which is clearly driven by a risk-off type of trade where people are de-risking, selling stocks, going into a safe haven asset like the 10-year US Treasury bond. Given that we've seen that, a major event that we can actually understand, we understand the reason why. Often when the stock market goes up or down, we don't really know why. But in this particular situation, we know why. So given that the risk has increased, stock market has taken a battering and at the same time, the crypto complex has taken a battering. That is consistent with a positive correlation with the stock market in a crisis event. And that's very important. So we've got a crisis event. We see a positive correlation. Stocks go down, cryptos go down. So given that we've seen that in a very important event over the last week, that would mean to me that in the future, if we have a similar sell-off in the stock market, a similar risk-off type of trade that the crypto complex is at risk. Thank you everyone for watching. My name is Jackson and that was Professor Campbell Harvey. If you enjoyed the show, please remember to like, subscribe and hodl. Coin Telegraph, like, subscribe and hodl.