This week in Crypto
COVID-19 induced volatility gripped the global equity markets last week, with the S&P 500 selling off by more than 12% during the week — Monday and Tuesday’s trading sessions alone wiping off $1.7trillion of value. When it was all said and done, the loss registered as one of the worst weeks in history and the worst single week since 2008. No equity market was spared, with the FTSE and EuroStoxx50 not faring any better. The best place to be was in 30yr US treasuries (a.k.a the “Long Bond”), the yield of which plunged to new all-time lows at 1.78%.
Cryptocurrencies have been under similar, albeit different, pressure this week with a ~15% correction across the board. We do not however believe that this is directly caused by the same COVID-19 fear that has driven equities, but rather just a partial reset of the recent rally. It is important to put the week’s drop into perspective — Bitcoin is still up circa 25% YTD, ETH circa 65% and others such as BCH and BSV even more than that.
As a market neutral, high frequency trading firm, Kenetic Trading thrives on increased volumes and volatility, where our algorithms are able to profit from the elevated number of dislocations and inefficiencies in the market. Needless to say, it has been a good month for our trading desk as we recorded record numbers in terms of both volume traded and profitability.
Picking up on the ‘’Bitcoin as a safe haven’’ theme…. Many sceptics will be quick to jump on the fact that Bitcoin failed in its role as a safe haven asset, as it was unable to shield against losses in equity markets and exhibited a highly positive correlation to other risk assets just at the time that a safe haven was needed. This argument is, however, somewhat short-sighted — a longer term view illustrating a correlation close to zero — clearly not as good as a negatively correlated asset during a broad downturn, but still an excellent portfolio component.
For the directional traders — looking ahead we don’t have a strong market view in either direction, as we remain well entrenched in the long-term triangle that we described last week. At this stage, we would definitely lean long, however we believe the best expression of that view is via call ratios, rather than an outright long delta position, given the lack of technical signals justifying an outright long position.
Bitcoin is Truth
As the world becomes ever more connected and the staggering advancements in human progress attributed to the internet are observed in real-time, it is worthwhile to look at some of the consequences of this instant, decentralized, readily available information flow that anyone with a smart phone or laptop can plug into. Never before in history has information and data been so obtainable with such little effort and cost. Similarly, never before can one person’s message reach such a global audience at such negligible cost and effort.
This ‘’free for all’’ has ushered in the age of distrust. Slowly our ability to rely on information has been eroded due to the overwhelming barrage of news, updates and notifications that anyone with a smartphone is subjected to. Who should we believe? What should be believe? When should we believe it? One might even call it the paradox of information — there is so much of it, yet we have a decreasing ability to know what to rely on and what to ignore.
A perfect example of really how far this data orgy has come is evident when the US president can conduct diplomacy using 280 characters, influencing society, trade agreements, markets and politicians on a whim. The acclaimed documentary — The Great Hack — shines an uncomfortable light on the age of fake news, lies and manipulation via social media. Most recently, the news coverage surrounding COVID-19 highlights the issues of information quality and distribution. Governments, scientists, journalists and political leaders all present different and often conflicting messaging, depending on where their political and business incentives lie. When the potential stakes are as high as a global flu pandemic, the world requires accurate reporting and analysis. The Chinese have demonstrated just how blatant the augmentation of the truth can be with their censoring of data and the reporting (or lack thereof) from ground zero in Wuhan.
For all the progress that it has created, the internet (and social media in particular) presents an increasing propensity to mislead, which creates significant problems in the face of global disasters and general panic. The way in which you access news and current affairs directly impacts your view of the world, with different demographics, ages, sexes and religions all forming wildly different and often polarizing views on the same subjects. This is no different to the deeply partisan cable news networks in the United States, which have shaped viewers’ opinions on a multitude of topics for several decades, however the accessibility of online news and the frequency with which opinions are now shared on social media results in the same truth being reported in dozens of ways, almost instantly.
When the subject du jour is a cause of life and death or the protection of jobs, wealth and savings then the stakes could not be higher:
Should we believe that the North Korea regime really doesn’t pose any significant military threat and that the US have it all under control?
Should we believe that the world’s economy is robust and the lessons we learnt from the GFC in 2008 have been heeded?
Are pensions properly capitalized and secure for the retiring baby boomers or have we all been misled and sold down the river?
Do governments have a plan when the next financial crisis hits? Do they really know what they are doing?
How serious is COVID-19 and do we have a plan? What are the risks?
Sadly, answers to these questions are hard enough to determine even for those whose job it is to find the truth in all the noise. To the average Joe, who takes their cue from the internet and social media, the impact of unchecked and unreliable information dressed up in legitimate, bite sized parcels is a dangerous combination.
Continuing this theme, there has been a lot of chatter this week about Bitcoin failing as its role as a safe haven asset. As the global stock markets take a pounding, Bitcoin prices also fell into the red whilst gold initially remained steady and traditional safe havens — US treasuries and the Japanese Yen — both strengthened considerably. So, what is Bitcoin if not a safe haven? Haven’t we all been told that this ‘’magic internet money’’ is Gold 2.0? Is this just more fake news just to pump the price? Should we believe it?
At its core, Bitcoin is a combination of mathematics and computer science and is perhaps unlike any other asset we have seen before, making it difficult to categorize at present. What we do know is that Bitcoin cannot lie or steal or be manipulated or faked. The Bitcoin blockchain just produces block after block every 10 minutes or so for the whole world to see, and it will likely continue to do so for a very long time. Bitcoin is a digital asset with a pre-programmed deflationary schedule that everyone and anyone can get access to should they wish. You can’t print more of it and you can’t really shut it down without incurring huge cost and effort and it is extremely reliable. Bitcoin is a welcome source of absolute truth in this increasing world of falsities and deceit.
Nathaniel Whittemore reminded us this week of the Bloomberg article that ex-Facebook executive and now Founder of VC firm Social Capital, Chamath Palihapitiya wrote way back in 2013, but is often referenced when citing the OG’s who identified Bitcoin first and foresaw the massive asymmetric investment potential of the technology.
Since the 2008 financial crisis, we have seen a massive decline in trust in the financial services industry: Lehman Brothers, Bear Stearns, American International Group, the “London Whale,” Cyprus and a host of lesser scandals have prompted consumers to say one thing loud and clear: “I don’t trust you.” Or “You’re only in it for yourself.” Or “Who made you king?” Or some very reasonable variant thereof. It seems the financial services industry’s best response is, “Trust me, I went to Harvard Business School.”
The point is that this fundamental trust no longer exists; in its place, rises Bitcoin.
I’ve told my friends that it is entirely rational to allocate one percent of your assets to Bitcoin — as I have. Call it schmuck insurance.
As we have said before, the investment case for allocation of people’s portfolio’s into Bitcoin is hard to ignore. At best, it will provide a huge windfall gain as fiat money is displaced and a digital, non-sovereign store of value takes its place. At worst, it is cheap schmuck insurance.
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