Since last October there has been a growing debate as to whether bitcoin (and other cryptocurrencies by association) are safe havens or risky, speculative assets. The stress test of the coronavirus crisis has helped to clarify this.
During the past two months, bitcoin has moved in sync with the S&P 500, betraying the fact that it is a risky asset. Gold, typically seen as a safe haven, has also risen but that is likely a response to falling interest rates, huge liquidity injections from the Fed and other central banks, and the possibility of monetary debasement.
Fed liquidity boosts bitcoin futures trading
The recovery in bitcoin has come alongside the overly generous provision of liquidity by the Fed, and the worrying development is the explosion in open interest in bitcoin futures (up to three times the average of the last year).
This points to the risk that bitcoin has now become a speculative plaything (several large hedge funds have become active in the bitcoin market) in markets and is at risk of a correction should risk appetite change.
Underlying this, on longer horizon view, bitcoin has also tended to move in sync with equities, for instance the peak in bitcoin in December 2017 prefigured weakness in equities.
Bitcoin is not gold
Still within the less ‘independent’ crypto currency community there is a view abroad that bitcoin and crypto currencies are a ‘safe haven’ in the same way people might for instance, regard gold. Recent behavior suggests this is not the case.
From the point of view of cryptocurrencies as assets, very basic data analysis suggests that optically bitcoin has a low correlation with safe havens like gold. This does not mean that bitcoin is a good diversifier or a safe haven. It has been highly volatile over the past two years and is subject to trading and liquidity risks not normally associated with safe havens.
A further clue as to the true nature of cryptocurrencies as investable assets comes from the community of people who hold and trade them. The micro-structure (or plumbing) of markets, as well as the anthropology and sociology of those who populate them (which will have to be the subject of a future missive) is crucial to the way they behave and subsequently to their risk characteristics. Note that the current spike in bitcoin futures trading coincides with a huge spike in Robinhood account trading and in retail buying of call options.
Bitcoin futures activity explodes
Though admittedly not scientific, nor thorough, I suspect that many bitcoin traders also trade equity futures and currencies and use the same equity trading rules (technical) to buy and sell bitcoin (cryptos now have their own rating system, FCAS). If this…