When investors start to hedge with bitcoin, you know as a developed country that your currency is in trouble.
Following the release of Liz Truss' mini-budget on September 23, which sent financial markets into a tailspin, some investors stampeded away from the pound and in the direction of cryptocurrencies.
According to research firm CryptoCompare's statistics, trade volumes between bitcoin and the pound increased 233% overall over the previous month, while those between the cryptocurrency and the equally damaged euro increased by 68%.
According to Ed Hindi, chief investment officer at Tyr Capital, "It was the first time we’ve seen such a huge increase in (bitcoin) volumes for the currency of a developed country."
According to market research firm Kaiko Research, trade volumes between sterling and bitcoin reached a daily record high of 846 million pounds ($955 million) on the Monday after the Friday budget shock, when the pound plunged to its lowest-ever level versus the dollar.
The volatility of bitcoin, meanwhile, is almost at its lowest point of the year. In contrast, according to the ICE BofAML US Bond Market Option Volatility Estimate Index, the volatility of safe-haven US Treasuries is almost at its highest level since March 2020.
In fact, according to statistics from Refinitiv, US Treasuries have been just as volatile as bitcoin over the past month of market turbulence. A measure of realized volatility shows that both bitcoin and the US 10-year note are currently hanging around 21, although at the beginning of September, bitcoin volatility was 65 vs 31, or more than double that of the bond.
A major selling factor for bitcoin in its early years was the possibility of protection against inflation and currency devaluation. That story started to fall apart as institutional use increased and cryptocurrencies started to trade more in lockstep with more established riskier areas of the financial markets.
So, are investors prepared to bet on a bitcoin hedge?
Similar examples of investors rushing into bitcoin when fiat money was under strain, such as in Russia and Ukraine this year, were reflected by the pound volumes.
One reason for the trend, according to experts, is that buying bitcoin is relatively simple for small investors compared to investing in the gold or foreign exchange markets.
Ben McMillan, chief investment officer of IDX Digital Assets, continued, "BBitcoin has always been not as much as ‘flight to safety’ as a ‘flight from crisis’ asset, even though GBP is nowhere near as weak as the rouble."
Some market players said that smart traders taking advantage of arbitrage possibilities presented by variations in the price of bitcoin were also responsible for the outflow from sterling.
On September 27, when it reached its peak in the previous six weeks, one bitcoin purchased approximately 19,000 pounds, compared to about 17,000 pounds on October 24.
It is evident that bitcoin is not a sure bet.
The largest cryptocurrency in the world has lost more than 58% of its value this year, while conventional safe havens like gold and US bonds (.MERG0Q0) are down roughly 10% and 15%, respectively, sterling has lost 16%, and the S&P 500 (.SPX) has lost more than 21%.
But in recent weeks, Bitcoin has steadied considerably, broadly around the $19,000 level.
According to researchers at CryptoCompare, trading volumes between bitcoin and sterling have now reverted to levels similar to those before the mini-budget, with the pound gaining momentum after the UK government changed its fiscal intentions.
However, the September spike, according to some cryptocurrency observers, was a sign of bitcoin's continued appeal as an asset outside of mainstream banking.
Researchers at CoinShares stated that "Large outflows from GBP into BTC imply investors see the value of having hard-capped, incorruptible, decentralized money as an alternative to currencies backed by central banks and governments."
By fLEXI tEAM