THE BITCOIN SKEPTIC – BITCOIN ISN’T A HEDGE FOR ANYTHING

WHAT IS A HEDGE? IT SURE AIN'T BITCOIN!

A “hedge” is an investment made to offset some form of risk. It can take many forms.

An investor may purchase put options on the stock market that will increase in value if the stock market falls. Perhaps a company will open a factory overseas that it exports products to in order to hedge against currency risk.

So the key to a hedge is that it, as an investment, offsets risk in another investment.

Risk is measured by volatility. The higher the volatility of a security, the riskier it is.

HOW TO MEASURE RISK

Volatility is measured by standard deviation.

To provide a baseline, the five-year standard deviation for the S&P 500 is 12. That means the S&P has a 95% likelihood of moving in a range of -24% to +24% in any given year.

Now let’s look at one of most volatile securities there is in the securities markets: crude oil. The five-year standard deviation for the United States Oil Fund ETF is 28.

Bitcoin is more volatile and riskier than this, but it gets worse.

Now let’s look at a 3x leveraged oil fund ETF, one designed to provide triple the returns of crude oil. The five-year standard deviation for the ProShares Ultra Bloomberg Crude Oil ETF is 54.

The five-year standard deviation for the Grayscale Bitcoin Trust ETF is 85. That means the average annual return of this ETF could swing 170 percent in either direction in any given year. That means, yes, it could go to zero.

That’s right. Bitcoin is 60 percent more volatile than even a 3x leveraged version of the most volatile security out there.

THIS "HEDGE" DOESN'T REDUCE ANYTHING

So how on earth could it be a hedge against anything?

Ed Butowsky, Managing Partner at Chapwood Capital Investment Management, tells CCN:

“Bitcoin is literally the riskiest tradeable asset right now, and I wouldn’t even call it an asset. It is literally backed by nothing and based entirely on speculation. That’s why it is so volatile. It's a sucker's bet, not a hedge”

Butowsky also points out that no other chart of any security anywhere correlates, either positively or negatively, to any other asset. Any expert who says otherwise is "dead wrong" – like this guy:

 

or those who say that makes it a perfect non-correlated asset to the stock market, the idea of a hedge is – once again – to offset risk.

Bitcoin only increases the overall risk in a portfolio.

 

By Lawrence Meyers 19/08/2019

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IRS Sends New Tax Warning to Crypto Users

The U.S. Internal Revenue Service (IRS) is renewing its crackdown on the crypto industry. According to a recent report from CoinDesk, the American tax agency is sending yet another round of letters to individuals it believes is involved in the trading of Bitcoin and other digital assets. This time, those targeted as those that the IRS claims may be misreporting the income gained from trading on exchanges.

This comes shortly after reports arose that the agency targeted users of Coinbase for potentially incorrectly filing their crypto-related taxes.

This latest letter is, according to crypto tax software startup CoinTracker co-founder Chandan Lodha, different than the previous case. He told CoinDesk:

“Basically what it says is ‘hey we have a report from one of the financial institutions you use and the amount they reported to us the IRS is different than the amount you, the taxpayer, reported and this is the amount you owe’ and it’s a 30-day letter meaning you have to respond in 30 days.”

He went on to advise those that have received this letter to respond, even if the recipient or their account doesn’t believe what was accessed.

These recent warnings seem to be a part of the agency’s plan to crack down on the crypto industry. You see, unlike the United States Dollar or the Euro, Bitcoin is a non-sovereign form of money, as are a number of other digital assets. At least currently, that means there are no “banks of Bitcoin”, no taxes that you have to pay in it, or governmental agencies directly overseeing it.

Due to simple politics, this is obviously something that governments across the globe, especially their finance regulation arms, aren’t entirely amicable with. Because you know what they say, “follow the money”.

Thus, the IRS has been renewing its efforts to catch evaders dealing with this asset class. According to an IRS slide deck leaked online earlier this year, the tax authority intends to allow its agents to use a number of techniques and tactics to target evaders. These techniques include interviews, “open-source searches”, electronic surveillance, social media scrutiny, and Grand Jury subpoenas.

 

By Nick Chong August 18, 2019

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BITCOIN COULD BREAK THROUGH TO A NEW HIGH IN 2019, PREDICTS TOM LEE

A debate has been raging about whether or not bitcoin should be deemed a safe-haven asset. After all, the leading cryptocurrency sure wasn't behaving like one and investors sure weren't doing a flight to safety in crypto while the equity markets were getting hammered this week. Even now, bitcoin is quietly holding onto $10,000 but not before having dipped below that key level in recent days.

Bitcoin bull and Fundstrat Co-Founder Thomas Lee is not the least bit spooked that investors didn't flock to bitcoin while the stock market – rightfully or wrongfully – signaled a recession. Lee told Fox Business that bitcoin, in fact, is a safe-haven asset, pointing to the premium price paid for the leading cryptocurrency in "markets that are in turmoil." Indeed, a Bloomberg report recently revealed that the bitcoin price was fetching premiums of 10 percent and 4 percent in Argentina and Hong Kong, respectively.

Defenders of bitcoin as a safe haven make the argument that you have look at the longer-term picture rather than the day-to-day action in the price. Fundstrat's Lee, for example, notes that BTC has more than tripled since year-end 2018. Its uncorrelation to stocks and bonds makes it a good "diversification hedge." Lee is also the one to recently remind us that BTC $10,000 is the FOMO level, but institutional investors seemingly have yet to come off of the sidelines.

Nonetheless, something about including "safe haven" and "bitcoin" in the same sentence seems off, given the unpredictable if not defiant nature in which the leading cryptocurrency trades. 2018 isn't too far in the rearview mirror, after all. Besides, why else would crypto asset managers advise such a small allocation to BTC vs. other asset classes? A rare opportunity – definitely. But safe is a little tougher to swallow. This vintage 1999 Jeff Bezos/Amazon.com video that has gone viral on Reddit reminds us of the nascent days of the internet that are comparable to where crypto is today.

BITCOIN TO THE MOON

Fundstrat's Lee is not out of the bitcoin price prediction business. After last year's bullish call for BTC $25,000 didn't work out, Lee backed off from making price forecasts for a while. With the wind seemingly at its back, bitcoin could make a strong finish in 2019 similar to its record display in 2017, and Lee doesn't want to miss out. He tells Fox Business host Stuart Varney:
 

"I think it's going to be much higher by the end of the year and potentially at new all-time highs. I think anyone who wants to have a 2 percent or 1 percent allocation to bitcoin as a hedge against a lot of things that could go wrong it's a smart bet."

By Gerelyn Terzo 15/08/2019

 

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Bitcoin’s Surging Dominance – Is This Time Really Different?

You may have heard some rumblings recently about the bitcoin dominance rate. This measures the weight of bitcoin in the crypto universe, by taking its market cap as a percentage of the total market cap for all crypto assets. Traders and investors keep an eye on it as an indicator of market preference.

It should surprise no-one that bitcoin is the dominant crypto asset, given its long track record and mainstream media attention. What is setting off alarms is its recent ascent: it is now hovering around 70 percent, a level not seen since April 2017, just before the previous bull market took off.

Some speculate that this means another bull run is imminent, one that will push bitcoin’s dominance to above 90 percent and effectively kill off any alternative crypto asset’s hopes of capturing significant market share.

Others see it as a sign that alternative crypto assets are on the verge of a recovery as investors pivot in search of outperformance.

As with any data point, there is much open to interpretation. Chart analysis aside, market metrics are rarely useful in isolation, and to get a feel for what the bitcoin dominance rate is telling us, we need a deeper understanding of what it represents – and why a rising number is not necessarily good news.

So what?

Why is the bitcoin dominance rate worth paying attention to? Surely everyone knows bitcoin is the leader?

Because it’s a relative measure that points to preference, conviction and momentum.

Price measures bitcoin’s popularity. Dominance measures its popularity relative to other crypto assets. In theory this could mean a “flight to quality” as investors get spooked by market risk and switch out of smaller cap tokens into a “safer” asset. Or, it could represent growing interest in the sector as a whole, along with conviction that bitcoin has the strongest fundamentals.

Either way, it highlights that, of all crypto assets, bitcoin is the most attractive from an investor’s viewpoint. (It’s important to note that dominance can increase as the price goes down, and decrease as the price goes up – it’s a relative, not absolute, measure.)

This matters for several reasons, one of which is what it says about market sentiment. While bitcoin is a speculative asset, it can be considered less speculative than smaller cap tokens, given its relative liquidity, history and network size. Its growing dominance points to a focus on fundamentals and on relative “safety,” which depicts a more grounded level of investor participation than in the ICO-fueled boom of 2017.

While not necessarily predictive, sentiment indicators tend to be recursive – you can’t be sure the trend will continue, let alone with what energy, but positive sentiment generally has in-built inertia. If traders choose to buy based on these indicators, they reinforce them, which encourages more traders to buy, and so on.

Another important consequence is market confidence, especially at the early stages of institutional involvement.

Large traditional funds are not, on the whole, particularly concerned with the relative merits of one token versus another. They are more likely to be evaluating whether to invest in crypto or some other speculative asset class as part of their portfolio diversification. For most, if they choose to invest in the sector, bitcoin is the only viable option: it’s the only one that 1) has sufficient liquidity to absorb a small- to medium-sized allocation; 2) has a lively derivatives market; 3) can count on a wide range of on-ramps and 4) is definitely not an unregistered security in most jurisdictions.

The protagonist role of bitcoin is likely to increase the confidence of traditional investors in the sector overall, burnishing its reputation and making their decision easier. In the absence of concrete valuations (difficult with bitcoin using traditional methods, since it has no cash flows), sentiment is usually as good a market indicator as any.

Now what?

No trend continues forever, though.

Previous run-ups in the dominance factor have been met with a correction as investor attention pivots and new alternatives come into play. In spite of momentum, in virtually all asset classes there comes a reckoning, in which market leaders become overvalued relative to the runners-up, and knowledgeable investors take profits in order to re-invest in more attractive opportunities.

But this is unlikely to happen in the short term, even though the last bull market saw bitcoin’s dominance drop from over 85 percent to below 40 percent. This time it is different.

Why? Last time the latter stage of the bull market was largely driven by the hyped potential of initial coin offerings, many of which promised revolution and riches based on marketing documents masquerading as white papers. The retail market poured into speculative tokens, which ramped up their value relative to the more “boring” bitcoin – at one stage, it looked like ether was going to push bitcoin off its market leader pedestal.

Recent market activity, however, has felt much more subdued (in spite of occasional shenanigans), largely due to increased regulatory scrutiny. The “sobering up” of the bear market, during which lawmakers and enforcers got to grips with the potential and threat of this new asset class, entrenched more rigorous standards for token issuers, promoters and investors. Many of the tokens issued in 2017 are now defunct, and while other interesting opportunities have emerged, the flow is more careful and calculated.

What’s more, the expected role of institutional investors in the next bull run, with their focus on bitcoin as the representative crypto asset, is likely to push bitcoin’s dominance up even further.

Then what?

What will it take for that to change?

All trends do eventually tire, to be replaced by new, more energetic ones. The same will happen with bitcoin. Once bitcoin investment by institutions is not such a novelty, and once deeper liquidity has dampened volatility, aggressive managers eager to beat their peers’ performance are going to start thinking about where to find alpha.

That’s when they start to look at other assets. They may rotate out of bitcoin into more overlooked alternatives; or they may put in fresh money. Either way, the relative weighting of other crypto assets will increase.

This is unlikely to happen any time soon, though.

Institutional involvement is just getting started and has a long way to run. Current currency turmoil and macro uncertainty may accelerate this, but a more likely scenario is that the bulk of institutional money, which tends to be relatively conservative, will wait for signs of further momentum before risking their reputations and returns.

The risk

Meanwhile, growing bitcoin dominance presents a risk we should not overlook: that bitcoin becomes firmly entrenched as the go-to crypto asset for the bulk of crypto investment, to the extent that it smothers interest in other ideas.

This would not be good for the sector, for two main reasons.

One, it would suck funding out of other areas of the market and stifle development of blockchain applications. Blockchain technology’s potential goes beyond bitcoin; it presents the opportunity to re-think how business models work, how assets can be valued and how income and capital can be distributed in a more decentralized economy. Other crypto assets are manifestations of this potential, and should be able to approach the market for funding and validation.

Two, concentration is a sign of an immature asset class. Imagine an emerging stock market in which one company accounts for 80 percent of the country’s market valuation. A diversified category will be more resilient, flexible and powerful, as internal connections and synergies empower a profitable irrigation of resources.

We are entering a phase where more attention will be paid to the dominance metric, which is likely to continue creeping up for some time. Some analysts are suggesting alternative calculations, taking out “fake volumes” and even stablecoins (since they are not seen as a competing investment vehicle) – a re-adjusted figure could be as high as 90 percent.

Could we get to a “tipping point” beyond which diverting attention from bitcoin will be extremely difficult?

It’s possible, but unlikely. People generally want to differentiate themselves from others; that also applies to their investment portfolios. Not only will investments in not-so-high-profile tokens better reflect retail investors’ personal preferences; but professional competition will also encourage crypto diversification in a search for outperformance.

Bitcoin’s dominance will probably continue to be unassailable for at least a few more cycles, though, and the inflow of funds, even if concentrated, will help the market infrastructure continue to mature. But, in the end, creativity and innovation always find a way to manifest.

Meanwhile, we should celebrate that bitcoin has not only survived but thrived. Its growing dominance and rising liquidity are signs that a greater number of investors believe in its potential. However, as exciting as that may be, it’s not the only thing going on.

As investors, we also need to keep an eye on what’s happening out of the limelight; from there will emerge the interesting opportunities of tomorrow.

 

 

Noelle Acheson

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