Risk lessons from Bitcoin

Somewhere in the world this year, I’m sure at least one financial engineering student, if not a bank’s risk department, has tried to apply VaR or other risk metrics to Bitcoin. The volatility and low liquidity alone make the FX market risk a challenge:



This week’s big Bitcoin story of course, especially for Asia watchers, was Thailand’s decision to simply ban the cryptocurrency. Also here:

Considering governments have historically confiscated valuables as tangible as gold or real estate, this really shouldn’t have been an unexpected black swan to anyone, especially to anyone sceptical how much of the world still probably has no understanding of how Bitcoin could possibly have any value at all (except to a greater fool).

As with other FX, Bitcoin has shown to have many of the same non-market risks, like capital controls in certain countries and channels. The biggest risk I still see is on how accepted it will continue to be – unlike gold I can’t count on a far off offline foreigner wanting to accept it, and unlike the US dollar, the coins are not backed by any naval or taxing power. Maybe that would change if the Cayman Islands or some other offshore financial center promoted it…


P.S. This all feeds in to the short piece coming up on sovereign risk.