Digital Currency Revolution Series: Bitcoin’s Functionality Amid Pandemic Crisis And Hedging Strategy

While quite a few market participants among the crypto industry have been obsessed for another financial crisis just like 2008 to check the functionalities of the major cryptos of being uncorrelated and acting as a safe-haven asset, Bitcoin significantly outperformed both the S&P 500 and gold between January and mid-March, before crashing from a 9.89% YTD return to a -30.17% YTD return in a single day on March 12, 2020. Bitcoin finished the quarter with a loss of -10.45%, but still outperformed the S&P 500, which ended the quarter down -19.92%. Despite outperforming gold for nearly the entire quarter, Bitcoin finished significantly shy below gold’s positive 3.6% YTD return because of Bitcoin’s drop on March 12 (refer 2nd chart). 

However, FX volatility index, for now, has eased a bit against the highs (19th March: 15% annualized 3 month volatility, refer 1st chart). Approximately about 9%, it is still way above the levels we saw before the pandemic coronavirus crisis that hit the entire financial markets including FX avenues. Does that mean that the FX market has only half-way returned to normal? 

At second glance one can say: by no means. In Q2 2019, but particularly in Q4 and in the first few days of this year was abnormally low. In that sense the intensity of the fluctuations expected by the market is currently more normal than it was for most of the past year.

Bitcoin was born during the last financial crisis at a time of massive bank bailouts, inflation, and central bank intervention. Q1 2020 was dominated by coronavirus, massive government stimulus packages, and slashes to interest rates. In this time of great macroeconomic uncertainty, Bitcoin’s digital gold narrative has reached its apex. 

Overall, during Q1, nearly all cryptocurrencies experienced highly correlated daily price movement. With the exception of Dash, every coin hit its highest quarterly price between Feb 3, 2020 and Feb 19, 2020. Every asset dropped to its lowest point on Mar 13, 2020. However, over the first three months of 2020, digital asset returns varied drastically from -22% to 58%. 

Although the bitcoin price has stabilized and attempting to create upside traction, minor dips are quite possible. But if you consider the broader perspective, from April'16, the BTC has spiked from $414 to the all-time highs of $19k, currently, trading at $ 7k mark, which is still 1,660% rallies. When this is the case with BTC, could we fairly criticise the performance of the pioneer cryptocurrency?

Needless to speculate anything on trend, and hence, the long hedges were advocated in past as well using CME BTC Futures. It is not prudent to count the chickens before they hatch, if we keep speculating on the next upside target and accumulate fresh bitcoins. Instead, one can certainly uphold the long hedges for now using CME BTC contracts of May deliveries (spot reference: $7,079. levels). Courtesy: eToro & Commerzbank