What is the hedging significance of Bitcoin?

Author: Daniel Kuhn Source: coindesk Translation: Shan Ouba, Golden Finance

The discussion about whether Bitcoin (BTC) can truly play a safe haven role has begun again.

The debate began last Saturday, when the cryptocurrency market plunged nearly 10% after Iran's failed missile attack on Gaza, and the price of Bitcoin fell from around $70,000 to below $62,000. On Monday, some insightful articles analyzed the matter, such as Jeff John Roberts of Fortune magazine comparing the event to the 17% increase in the price of gold, and Casey Wagner of Blockwork studied the fluctuations in gasoline prices during the Middle East crisis.

This is indeed the case. After the attack, there were more buyers than sellers for oil and gold, and more sellers than buyers for Bitcoin, so the former two appreciated and the latter depreciated. Still, I have always believed that intraday price fluctuations don’t tell a whole lot about an asset as volatile as Bitcoin. Worse, gold prices continue to rise (just as they did after the collapse of Lehman Brothers), while Bitcoin, after a brief rebound on Sunday, has been falling this week and is now trading just over $60,000. While the looming threat of World War III could keep a lid on Bitcoin’s price, the market seems to be leaning more toward the suggestion that the Fed may keep rates higher for longer because the economy is doing well. However, asking whether Bitcoin is truly a safe-haven asset seems overkill when it has been behaving more and more like tech stocks in recent years. Before the pandemic, Bitcoin had a low correlation with the S&P 500, so it clearly acted as a countercyclical asset. The question is, what has changed between then and now? Also, what exactly is Bitcoin supposed to hedge against? Stocks? Inflation? U.S. Treasuries? Or political unrest? Is Bitcoin an economic safe-haven asset for all situations? There are likely multiple factors at play, including the number of Bitcoins in circulation, the number of holders, and the increase in the number of whales. But to some extent, the answer is already clear: Bitcoin has been institutionalized. As Barron’s reported in January when the first spot Bitcoin ETF was launched: “Bitcoin volatility has been steadily declining since its launch more than a decade ago. According to Bauer, volatility (measured as a 100-day average of daily price fluctuations) has never exceeded 4.5% since the introduction of Bitcoin futures that track the spot token price. Since the launch of the ProShares Bitcoin Strategy ETF (a Bitcoin futures fund) in 2021, the metric has never exceeded 3.5%. Over the past year, volatility has remained below 2.6%.” While geopolitical tensions may curb Bitcoin’s price gains, the market seems to prefer signals from the Federal Reserve to maintain higher interest rates, which may reflect strong economic performance.

However, as Bitcoin has behaved more and more like tech stocks in recent years, it is questionable whether Bitcoin is really a safe haven asset. Before the pandemic, Bitcoin had a low correlation with the S&P 500, so it could clearly play a counter-cyclical role. The question is, what has changed between then and now? What exactly is Bitcoin supposed to hedge against? Stocks? Inflation? U.S. Treasuries? Political unrest? Can Bitcoin be an economic safe haven asset for all situations?

There are multiple factors that may be at play, such as the number of Bitcoins in circulation, the number of holders, and the increase in the number of large whales. But in a sense, the answer is already clear, Bitcoin is becoming institutional. Barron’s reported in January when the first spot Bitcoin ETFs were launched:

“Bitcoin’s volatility has been steadily declining since its launch more than a decade ago. The measure of volatility (the 100-day average daily price fluctuation percentage) has never exceeded 4.5% since the introduction of Bitcoin futures. This trend may accelerate as some of the spot Bitcoin ETFs launched this year have become one of the fastest-growing financial products. As the barrier to entry into the Bitcoin market decreases and Bitcoin becomes more mainstream, its correlation with stocks may become closer. People who buy Bitcoin and fund managers now also buy S&P 500 index funds, investor behavior is converging.”

In fact, the entire theory of “Bitcoin becoming a mainstream payment method” is based on the premise that increased Bitcoin adoption will reduce its price volatility, making it a viable medium of exchange. The problem is that this idea is based on the premise that the fiat system will collapse as the broad, circular Bitcoin economy grows. In other words, Bitcoin should become less volatile and less correlated with other assets. This is Bitcoin’s safe-haven function.

This may stem from a fundamental myth of Bitcoin, that it is “digital gold”. However, this is a poor metaphor. While linking Bitcoin to gold suggests potential value, it sets false expectations before people really understand how Bitcoin works.

Calling Bitcoin “digital gold” may be one of the roots of the mixed views we have today. Bitcoin is expected to be many things at once: a safe haven, a store of value, a payment method, a beta investment, a bet on fiat currencies, and, increasingly, a development platform. Everyone wants Bitcoin to be a universal asset, but the reality is that the one thing Bitcoin has been really good at doing for more than a decade is absorbing excess liquidity.

For the most part, we don’t know how Bitcoin would perform if a major crisis occurred. As S&P analysts wrote in a 2023 report on the macroeconomic impact of cryptocurrencies: "Unprecedented quantitative easing by global central banks has increased money supply to record levels since 2008/09," suggesting that Bitcoin's growth may be due to an increase in money supply.

In the past, Bitcoin was seen by some as a potential safe-haven asset as an alternative to gold due to its price volatility and scarcity. However, in recent years, Bitcoin's market performance has become more and more like that of technology stocks, raising questions about its safe-haven function.