Why bitcoin continues to vacillate between a store of value and a risk asset
by James · April 28, 2023
Investors are not sure what to do with bitcoin right now. Since the beginning of the year, the cryptocurrency has acted as both a risk asset and a hedge against uncertainty. That has been especially true since the turmoil in the US banking sector began in March and returned volatility to the market. Bitcoin has risen 77% this year. Volatility (and therefore uncertainty) is a key characteristic of cryptocurrencies – at least for now. Despite what looks and sounds like institutional adoption and mainstream progress, it’s still very early days for the industry, so getting comfortable with its unpredictability is step one to being a good investor in it, according to Tyrone Ross, president and founder of financial planning firm 401 Financial. “If you invest in bitcoin, you understand that this is par for the course, it just is,” he told CNBC. “You can dollar cost average and hold it. Traders who have used a lot of leverage and have been liquidated in shorts—those people have a completely different set of problems than those who really see it as an investment. These moves shouldn’t bother you if you are truly an investor in bitcoin and understand it.” “Believe in the core reasons you’re putting money in, and hopefully there’s some ‘narrative’ around it that you can hang on to when it gets really volatile like this,” he added. Bitcoin spent much of 2022 tied to stocks , with inflation data and Fed policy as the main price drivers. That correlation has fallen since the beginning of this year, but bitcoin remains sensitive to the macro economy. Meanwhile, the correlation with gold increased in early March when the banking crisis began. This week, just as crypto volatility had returned to pre-crisis lows, problems at First Republic Bank raised concerns about the health of US banks, and bitcoin rose as much as 8%.Still, investors are holding their breath for the next policy decision from the Fed at its meeting next week – with many expecting a hard landing and positioning for dollar decline and interest rate cuts Additionally, with so much liquidity drained from the market over the past two months, investors don’t trust any bitcoin rally to turn into the next big bull run. “Because bitcoin takes on a lot of asset profiles — risk assets, store of value, VC-like asset class — it’s actually very attractive to invest in it,” said Greg King, CEO of investment firm Osprey Funds. “Truly uncorrelated assets, with unpredictable behavior and a positive expected value, are rare jewels in portfolio allocation.” “Being highly volatile means that even a small allocation of bitcoin to a portfolio is enough to make the investment noticeable,” he added. A Very Early Technology Play Looking at the price trajectory on short time frames, bitcoin will and often mimics high risk assets. However, the volatility will dissipate, as it has for other new technology advances before it, according to Mark Connors, head of research at Canadian investment fund manager 3iQ. He pointed out that over the past 10 years, bitcoin has fallen from 5x more volatile than the Nasdaq in 2015 to 3x in 2019, to just 1.8x at the end of last year. “The qualities that make it an exponential grower show up over periods of quarters and years,” he said. “It’s reducing the volatility profile at a higher rate relative to equities,” he said. “Mature assets don’t have high adoption rates,” he added. “People already own all the stocks they’re going to own. We’re not going to have another 20% of people buying stocks because there aren’t 20% of people around to buy stocks—birth rates are down, portfolios are mature.” Ross took a nuanced view, arguing that bitcoin remains a highly volatile asset. BTC.CM= 1Y mountain Bitcoin in the past year For the past decade, traders have struggled to understand bitcoin’s identity, sometimes with little patience for its novelty and ability to transform from one thing to another. It was designed to be digital cash for those excluded from the formal financial system. New entrants to the market who came in the 2021 bull run were sold on the idea of a hedge against inflation. They have become used to it being traded like a stock. “Is it pristine security for some people? Maybe,” Ross said. “Is it a better currency for some people? Yes. Is it an inflation hedge? It didn’t seem like it was. Is it security when First Republic Bank looks like it’s on the verge of collapse? Sure. But it’s a speculative asset which is highly volatile and benefits from a very fluid environment,” he said. For Ross, it is also a technology venture. New crypto investors often overlook the Bitcoin technology, focusing instead on bitcoin which is a crypto asset. Ross is optimistic about its ability to function as a financial system for those without access to bank accounts. “We have a venture capital investment essentially, with liquid pricing,” Connors said. “It’s a combination we’re not used to, so having an understanding of it is job one. The other is sizing it right so you’re not looking at it all the time.” “Volatility is a price you pay, and as people say, the price is the least interesting thing about bitcoin – although it’s a tough pill to swallow,” Connors added.
