Showing posts with label safe haven. Show all posts
Showing posts with label safe haven. Show all posts

Friday, December 28, 2018

28/12/18: BTCD is neither a hedge nor a safe haven for stocks


A quick - and dirty - run through the argument that Bitcoin serves as a hedge or a safe haven for stocks. This argument has been popular in cryptocurrencies analytical circles of recent, and is extensively covered in the research literature, when it comes to 2014-2017 dynamics, but not so much for 2018 or even more recent period dynamics.

First, simple definitions:

  1. A financial instrument X is a hedge for a financial instrument Y, if - on average, over time - significant declines in the value of Y are associated with lower declines (weak hedge) or increases (strong hedge) in the value of X.
  2. A financial instrument X is a safe haven for a financial instrument Y, if at the times of significant short-term drop in the value of Y, instrument X posts increases (strong safe haven) or shallower decreases (weak safe haven) in its own value.
So here are two charts for Safe Haven argument:


The first chart shows that over the last 12 months, there were 3 episodes when - over time, on average, based on daily prices, stocks acted as a strong hedge for BTCUSD. There are zero periods when BTCUSD acted as a hedge for stocks. The second chart shows that within the last month, based on 30 minutes intervals data (higher frequency data, not exactly suitable for hedge testing), BTCUSD did manage to act as a hedge for stocks in two periods. However, taken across both periods, overall, BTCUSD only acted as a weak hedge.

The key to the above is,  however, the time frame and the data frequency. A hedge is a longer-term, averages-defined relationship. Not an actively traded strategy. And this means that the first chart is more reflective of true hedging relationship than the later one. Still, even if we severely stretch the definition of a hedge, we are still left with two instances when the BTCUSD acts as a hedge for DJIA against two instances when DJIA acts as a hedge for BTCUSD.

People commonly confuse both hedging and safe haven as being defined by the negative symmetric correlation between assets X and Y, but in reality, both concepts are defined by the directional correlation: when X is falling, correlation myst be negative with Y, and when Y is falling, correlation must be negative with X. The downside episodes are what matters, not any volatility.

Now, to safe haven:

Again, it appears that stocks offer a safe haven against BTCUSD (6 occasions in the last 12 months) more often than BTCUSD offers a safe haven against stocks (2 occasions).  Worse, the cost of holding BTCUSD long as a safe haven for stocks is staggeringly high: some 60-65 percentage points over 12 months, not counting the cost of trading.

In simple terms, BTCUSD is worse than useless as either a hedge or a safe haven against the adverse movements in stocks.

Monday, March 19, 2018

19/3/18: Bitcoin as a Hedge?..


The story of Bitcoin has been told, repeatedly, as a story of an asset that offers a hedge to stocks, a hedge against the fiat currencies and a hedge against the excesses of QE. That story is pure, unadulterated bullshit.


As the chart above shows, Bitcoin is more of a lead-indicator to S&P 500, than a hedge. With volatility well in excess of other comparable instruments. 

Friday, March 3, 2017

3/3/17: Gold vs Bitcoin: Prices vs Values


Marketwatch reported earlier that Bitcoin is currently being priced at above the price of gold in USD terms: http://www.marketwatch.com/story/bitcoin-is-now-worth-more-than-an-ounce-of-gold-for-the-first-time-ever-2017-03-02?siteid=bnbh

The comparative is somewhat silly, because, as Marketwatch article notes, Bitcoin market cap is much much smaller than that for gold, which implies that any valuation of Bitcoin to-date incorporates a hefty liquidity risk premium compared to gold. In addition - unmentioned by the Marketwatch - Bitcoin lacks key financial properties of gold, including:

  1. Established safe haven properties: gold acts as a safe haven instrument against large scale or systemic risks. Bitcoin is yet to establish such property with any conviction. There are some indications that Bitcoin may be seen in the markets as a hedge against some systemic risks, e.g. capital controls in China, but this property is yet to be fully confirmed in data. Beyond such confirmation, there is no evidence to-date that Bitcoin acts as a safe haven for other systemic risks (e.g. sovereign debt crisis risks in the Euro area, or political risks in the EU, etc).
  2. Hedging properties: Bitcoin shows no hedging relationship to key asset classes, in contrast to gold.
The above points mean that in addition to liquidity risks, Bitcoin price is also factoring in premium for lacking the broader safe haven and hedging properties.

While the continued evolution of Bitcoin is a great thing to watch and take part in, immediate valuations of Bitcoin are subject to severely concentrated risks, including the currently extremely elevated risk of Bitcoin demand being severely skewed to China (http://trueeconomics.blogspot.com/2017/01/18117-bitcoin-demand-its-chinese-tale.html) and the supply and legal rights issues with Bitcoin. Hence, as it says on the tin: the comparative to gold is silly, even if entertaining.

Thursday, November 10, 2016

9/11/16: Bitcoin vs Ether: MIIS Students Case Study


Following last night's election results, Bitcoin rose sharply in value, in line with gold, while other digital currencies largely failed to provide a safe haven against the extreme spike in markets volatility.

In a recent project, our students @MIIS have looked at the relative valuation of Bitcoin and Ether (cryptocurrency backing Ethereum blockchain platform) highlighting

  1. Fundamental supply and demand drivers for both currencies; and
  2. Assessing both currencies in terms of their hedging and safe haven properties
The conclusion of the case study was squarely in line with Bitcoin and Ether behaviour observed today: Bitcoin outperforms Ether as both a hedge and a safe haven, and has stronger risk-adjusted returns potential over the next 5 years.



Friday, January 15, 2016