Could this be the reason bitcoin collapsed this year?
To have! Now we know why bitcoin has collapsed this year.
That was because the brilliant long-term crypto market already knew, months and months ago, that President Joe Biden would end up signing the $740 billion “Inflation Reduction Act” on August 16th… and that this law would be so powerful that it would cause inflation to hide to “0%” a month before it was signed!
And if Uncle Sam is ready to pass an anti-inflation bill so incredible that it even works retroactively… why would anyone still need bitcoin, which, as we all remember from Finance 101, is a “safe haven” against inflation and monetary degradation?
Right?
This may sound as hallucinogenic and ridiculous as Lucy in the Sky with Diamonds, but it wasn’t long ago that crypto bros were making arguments almost as clumsy as this, and possibly even more so.
One of the less ridiculous, and more persistent, was the argument that bitcoin and other cryptocurrencies would somehow “diversify” your 401(k), IRA or other retirement accounts, because they would perform as asset classes differently than stocks, bonds and the like. . Such arguments can be dangerously seductive, because they can be technically true without being helpful. For example, lottery tickets are a “diversifying” resource, because the return on a fistful of lottery tickets has absolutely no correlation with, or connection to, the stock or bond market. But that doesn’t change the fact that lottery tickets are terrible investments.
So it was timely that finance professors Luciano Somoza and Antoine Didisheim at the University of Lausanne and the Swiss Finance Institute not long ago produced a research paper, “The End of the Crypto-Diversification Myth,” that exploded this fallacy.
“One of the most important rationales for including cryptocurrencies in long-horizon portfolios is the promise of diversification from the stock market,” they write. “Since none of the proposed – and much debated – fundamental values behind cryptoassets have a clear relationship to stock returns, it is reasonable to assume that the two asset classes should be uncorrelated.”
Or rather, they add, it our reasonable to think so. Until the last couple of years. Because, they report, “since 2020, the correlation between bitcoin and the S&P 500 has been consistently positive, reaching values as high as 60%.”
And, they add, there’s a simple reason for this – and if a crypto trader wants to know what that reason is, they should … look in the mirror. “We argue theoretically and empirically that this correlation is largely caused by the trading habits of retail investors. Namely, the fact that crypto-oriented retail investors tend to trade cryptocurrencies and stocks at the same time and in the same direction.”
Somoza and Didisheim accessed trading data from SwissQuote, Switzerland’s leading online trading platform, which allowed crypto and traditional stock trading from the same platform and the same accounts or online “wallets.” They were able to compare the individual daily trades in stocks and cryptocurrencies of tens of thousands of customers.
Their findings: “Retail investors are engaging in cross-asset buying and selling, and that this behavior became prominent in early 2020.” And, they add, “when we look at the stocks preferred by agents [i.e., clients] that hold cryptocurrencies, we observe a strong preference for growth stocks and speculative assets. When agents open a cryptocurrency wallet, their overall portfolio becomes riskier.” In fact, “this new group of traders seems to perceive cryptocurrencies as a kind of technology stock, well-suited for short-term speculation.”
They also found that cryptocurrency trading not only jumped on the speculative bandwagon, but helped keep it rolling. When SwissQuote customers opened a cryptocurrency wallet, Somoza and Didisheim found, they were more likely to log into their accounts more often and trade more often in general.
It is hardly a coincidence that bitcoin BTCUSD,
peaked last November – around the same time as the Nasdaq Composite COMP,
Or that it plunged for the first half of this year, along with Nasdaq and the S&P 500 SPX,
Or that it has risen somewhat since mid-June — again, with the stock market.
bitcoin did not increase during the first few months of the year. Not even when war broke out in Europe and when inflation – and inflation expectations – skyrocketed.
It turns out that it has behaved just like a technology stock on speed. Don’t believe me? Direxion, a mutual fund company, is best known for its extra-volatile exchange-traded funds. Among them are the Direxion Daily Technology Bull 3x fund TECL,
which uses derivatives to try to give you 300% of the performance, up or down, of the tech sector every day.
Over the past 5 years, bitcoin has risen from $4,400 to $23,300, or about 430%. But in the same period, TECL has risen almost as much. (Actually a little more.)
In other words, bitcoin has not been “diversified” at all. It’s just been another speculative, leveraged gamble on the tech bubble.
