This week, the cryptocurrency underperformed as a haven for the economy. However, bitcoiners are looking farther ahead.
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Oh no, it’s happening again: The question of whether bitcoin (BTC) is a hedge is once again up for debate.
The talks started on Saturday, following the cryptocurrency’s nearly 10% decline, from approximately $70,000 to less than $62,000, in response to Iran’s abortive missile attack on Gaza. A few columns were sparked by the move on Monday, including one from Fortune’s Jeff John Roberts, which contextualized the move in light of gold’s 17% surge, and another from Blockwork’s Casey Wagner, which examined the movement of gas prices in response to Middle Eastern crises.
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It’s true that after the attack, there were more buyers than sellers of gold and oil, and more sellers than buyers of bitcoin; as a result, the value of the former increased while the latter decreased. However, I’ve always believed that, for an asset as volatile as bitcoin, intraday price movements reveal very little. The bad news is that, although bitcoin saw a brief spike on Sunday, it has been steadily declining this week, reaching lows in the $60K range. Meanwhile, gold is still rising, much like it did following the failure of Lehman Brothers.
Bitcoin may be suffering from the impending threat of World War I, but the market is probably reacting to signals from the Fed that they may keep interest rates higher for longer than they had planned because the economy is doing well. However, it seems inappropriate to question whether bitcoin is a hedge given that it has been acting more and more like a tech stock in recent years.
Bitcoin can obviously function as a countercyclical asset because, prior to the pandemic, it was largely uncorrelated with the S&P 500. What has changed between then and now is the question. What precisely is bitcoin meant to hedge, by the way? Equities? A rise in prices? US Treasury Bonds? Unrest in politics? Is bitcoin designed to be a universally accessible financial safe haven?
The quantity of bitcoin in circulation, the number of holders, and whales are probably some of the factors at work. However, the solution is rather obvious in that bitcoin has become institutionalized. During the time of the January launch of spot bitcoin ETFs, Barron’s reported:
Since its inception more than ten years ago, Bitcoin’s volatility has continued to steadily decrease. Since the launch of bitcoin futures, which mirror the price of the spot token, volatility, as determined by the 100-day average of daily price swings in percentage points, hasn’t surpassed 4.5%, according to Bauer. That metric hasn’t gone above 3.5% since the ProShares Bitcoin Strategy ETF, a bitcoin futures fund, launched in 2021. The volatility over the last year has remained below 2.6%.
Although volatility isn’t everything—and it still varies significantly from traditional equities—it is a distinguishing characteristic of the asset, at least as it was previously understood to be. Did anyone really believe that bitcoin would never stop fluctuating? As liquidity and scale grow, volatility resulting from small, idiosyncratic events diminishes in any market that is expanding from new to mainstream, according to Austin Campbell, assistant professor at Columbia Business School.
This trend might pick up speed with the introduction of spot bitcoin ETFs, some of which have grown the fastest among financial products this year. The relationship between bitcoin and stocks may get closer as entry barriers disappear and the cryptocurrency gains traction. The S&P is bought by the same individuals and fund managers who are currently purchasing bitcoin; investor psychology is blending.
Actually, the entire premise behind “hyperbitcoinization” is that as more people use bitcoin, its price volatility will decrease and it may become a practical medium of exchange. The problem with this idea is that it was based on the assumption that the fiat system would collapse as a widespread, circular bitcoin economy grew. Put another way, it was anticipated that bitcoin would become more uncorrelated and less volatile. That was the hedge for bitcoin.
This could have its roots in the widespread misconception that bitcoin is “digital gold.” However, it’s a flawed metaphor—good in that a connection to gold suggested that Bitcoin might have value, but bad in that it created false expectations at a time when nobody really knew how Bitcoin would behave.
We have a jumble of concepts about bitcoin today—it’sa hedge, a store of value, a payment method, a beta trade, a wager against fiat, and, more and more, a development platform—probably because digital gold became the standard description. While everyone wants bitcoin to be everything at once, over the past fifteen years, it has essentially excelled at just one thing: absorbing excess liquidity.
We largely don’t know how bitcoin will fare in the event of a crisis. “Unprecedented levels of monetary easing by central banks across the world since 2008/09 have increased money supply to record levels,” S&P analysts wrote in a 2023 report about macroeconomic impacts on cryptocurrency, implying that the money supply increased and that bitcoin grew as a result.
At present, bitcoin may simply flow the crowd, increasing when the economy expands and declining when it contracts. However, the real hedge that Bitcoin enthusiasts anticipate is more of a sudden surge.
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