British pound fiasco boosts bitcoin’s hedge appeal
By Lisa Pauline Mattackal
(Reuters) – As a developed nation, you know your currency is in trouble when investors start hedging with bitcoin.
After Britain’s short-lived Prime Minister Liz Truss unleashed her mini-budget on September 23, filling financial markets with fear, some investors stomped away from the pound and towards the cryptocurrency.
Trading volumes between bitcoin and the pound jumped 233% in September overall from the previous month, according to data from research firm CryptoCompare, while trading between the cryptocurrency and a similarly exposed euro also jumped 68%.
“It was the first time we’ve seen such a large increase in (bitcoin) volumes for the currency of a developed country,” said Ed Hindi, chief investment officer at Tyr Capital.
On the Monday after Friday’s budget shock, when the pound fell to an all-time low against the dollar, trading volumes between sterling and bitcoin rose to a daily record high of 846 million pounds ($955 million), according to market data firm Kaiko Research.
Meanwhile, bitcoin’s volatility is near the lowest it’s been all year. In contrast, volatility in US bonds is close to the highest since March 2020, as measured by the ICE BofAML US Bond Market Option Volatility Estimate Index.
In fact, during the past month of market volatility, US Treasuries have been as or more volatile than bitcoin, according to Refinitiv data. Both bitcoin and the US 10-year note are now hovering around 21, according to a measure of realized volatility, while in early September bitcoin volatility was more than double that of the bond, at 65 versus 31.
(Bitcoin trading volume against British pound https://graphics.reuters.com/FINTECH-CRYPTO/gkvlwmwnkpb/chart.png)
“FLY FROM CRISIS”
In bitcoin’s infancy, a key selling point was its potential protection against currency depreciation and inflation. That narrative began to break down as greater institutional adoption meant cryptocurrencies traded more in lock step with traditional risky corners of the financial markets.
So are investors ready to bet on bitcoin as a hedge again?
The pound volumes reflected similar cases of investors jumping into bitcoin as fiat money came under pressure, including in Russia and Ukraine this year.
Experts pointed to the comparative ease for small investors to buy bitcoin, rather than entering the gold or currency markets, as a factor behind the trend.
“Bitcoin has always been not so much a ‘flight to safety’ as an ‘escape from crisis’, although the GBP is nowhere near as weak as the ruble,” added Ben McMillan, chief investment officer at IDX Digital Assets.
Some market participants said the flows from sterling were also driven by savvy traders taking advantage of arbitrage opportunities from changes in the price of bitcoin.
One bitcoin bought almost £19,000 on September 27, the highest level in six weeks, compared to around £17,000 on October 24.
THE PRICE OF BITCOIN
Bitcoin is not a safe bet. Clearly.
The world’s largest cryptocurrency has fallen over 58% this year, while the traditional safe bets of gold and US bonds are down around 10% and 15% respectively, sterling has lost 16% and the S&P 500 has fallen more than 21%.
However, Bitcoin has stabilized somewhat in recent weeks, hovering roughly around the $19,000 mark.
Trading volumes between bitcoin and sterling have now fallen back to around their pre-mini-budget levels, CryptoCompare analysts said, with the pound on the rise after the UK government reversed its fiscal policy plans.
Some crypto-watchers say the September surge was nonetheless a reflection of bitcoin’s enduring appeal as a resource outside of mainstream finance.
“Large outflows from GBP to BTC imply that investors are seeing the value of having hard-capped, incorruptible, decentralized money as an alternative to currencies backed by central banks and governments,” researchers at CoinShares said.
($1 = 0.8856 pounds)
(Reporting by Lisa Pauline Mattackal in Bengaluru; Additional reporting by Alun John in London; Editing by Pravin Char)
