Cryptocurrency
Bitcoin Can’t Be a Safe Haven and 100x Leverage Is the Reason Why
As read on Coindesk, “Despite some championing, it is clear bitcoin is still a risky asset on a peripheral investment frontier, and not a safe haven at all. “Bitcoin is simply not going to be a primary concern for capital swimming around in traditional markets. Remember, this is a time when assets like U.S. equities are enduring unprecedented […]
As read on Coindesk, “Despite some championing, it is clear bitcoin is still a risky asset on a peripheral investment frontier, and not a safe haven at all.
“Bitcoin is simply not going to be a primary concern for capital swimming around in traditional markets. Remember, this is a time when assets like U.S. equities are enduring unprecedented volatility. There would need to be a return to frothy markets and the comeback of marginal greed to see more institutional players wandering inside the crypto gates.
“You might think macro developments such as profligate money printing would give bitcoin a reasonable investment thesis. But that is not manifesting, and for good reason. The ecosystem around bitcoin is limiting its own long-term prosperity. Topping the list of ailments is bitcoin volatility, which is artificially created by high-leverage.
“With the crypto options market becoming more entrenched over the past year, it’s possible to observe a pattern in bitcoin volatility. There hasn’t been a sustained meaningful premium of implied volatility (the market’s forecast of the likely movement of price), over realized volatility. Bitcoin’s implied volatility rarely dips below 50 percent. In fact, bitcoin enjoys a rather patterned ‘vol of vol,’ whereby implied and realized volatility move almost rhythmically together, fluctuating between 40 percent and above a 200 percent ceiling.
“An asset like bitcoin that over the course of years sustains an implied volatility of over 50 percent is truly remarkable. For comparison, stocks with a sustained volatility of even 25 are often classified as high-beta (meaning they out-perform the market when it’s going up but fall precipitously when it’s going down).
“So, what is it that plagues bitcoin to create such outsized moves? Well, the biggest problem is the extreme amount of leverage in crypto derivative markets.
“As they try to increase adoption, cryptocurrency derivative trading platforms deal with a very unique situation. Bitcoin holdings are heavily concentrated, with 95 percent of physical supply owned by a relatively small number of addresses. At the same time, a great many traders on these platforms have a very strong appetite for risk. That is the short story of why 100x leverage is now commonplace in crypto markets. There is a need to cater to the demands for rapid ‘financialization’ of concentrated holdings.
“Leverage at 100x margin is attractive (at least superficially) to an investor looking to reduce capital requirements while increasing exposure. Regulated exchanges offer approximately 3.5x leverage onshore. But an apple-to-apple comparison is misleading; on- and offshore markets are different.
“Firstly, many offshore crypto exchanges act not only as a trading venue, but also as clearer and custodian – a complete vertical integration orchestrated by a company registered on a small island somewhere. This is versus the siloed and ‘arms’ length’ functions in more regulated environments. Ultimately, this puts a huge amount of responsibility, and tremendous power, in the hands of offshore exchanges…”