Bitcoin (BTC) proves it is a risk-off asset
Friday’s (January 3rd, 2019 trading sessions saw speculators and investors pouring into Bitcoin as a risk-off asset. Attempts to sell-off the rally failed; weekend trading shows hints of higher moves.
Death of Iran’s #2 causes extreme volatility across all markets
Yesterday (January 3rd, 2019) was one heck of a trading day. When it was announced that the US targeted one of the worlds leading financiers of terrorism, markets reacted violently. Oil spiked up nearly +5% and ultimately closed higher for a +3.06 gain. The NASDAQ moved as much as -1.86% lower but retraced a good amount of that loss to close at -1.04%. The S&P 500, likewise, advanced as far as -1.67% lower only to retrace nearly half of that amount to close Friday with a -0.80% loss. Both the NASDAQ and the S&P 500 made new all-time highs during the overnight trading sessions. Gold and Silver also experienced some big moves, with Gold closing higher at 1552.39 for a +1.52% gain – very close to the 2019 highs. Silver, on the other hand, was up +1.38% but ultimately lost nearly the entire increase to close up a marginal +0.14%. I should point out that Silver has been outperforming Gold for roughly one month, so some technical weakness of Silver against Gold is very typical. But how did Bitcoin fair?
Bitcoin is an entirely different beast when it comes to geopolitical black swan events. Bitcoin is both a risk-on and risk-off asset – but when significant events like the death of Iran’s #2, Bitcoin didn’t sell-off with other risk-on instruments. Both the US Dollar and the Japanese Yen traded higher – generally, they move to the inverse. Gold, Silver and Oil moved higher. Equities sold off. But Bitcoin spiked. Why? Speculators viewed Bitcoin as a source of security. Bitcoin has two underlying fundamental principles. The first principle is that Bitcoin is a bulwark against fiat currency and a source of financial/asset security that is extremely difficult for anyone to confiscate. The second principle is that Bitcoin is perhaps the single riskiest speculative instrument in the world. You have two kinds of people involved in Bitcoin: those who want to profit from its growth in value and those who need it to keep their wealth safe from corrupt entities.
Historically, Bitcoin has followed the stock market. I know people continue to claim that Bitcoin is essentially ‘digital gold’ – and from a political/idealistic perspective, it is – but Bitcoin follows the stock market more than it does Gold. Bitcoin’s price action is weighted more heavily towards the movement of risk-on instruments like the FTSE100 and the S&P 500. Bitcoins role as a source of security has not been tested enough to confirm that it is more of a source of security versus a source of risk. But incidents like Friday’s show some proof of Bitcoin’s importance in an uncertain world. We’ve seen Bitcoin spike, locally, in countries where their currency is failing and the governments of those nations have restricted the people from converting their national currency into US Dollars or Euros – they’ve instead changed into Bitcoin (Turkey, Argentina, Venezuela, Indonesia, Iran, Iraq, Jordan, and others). We can and should expect that when the next currency crisis hits sovereign currencies of the US, Britain, EU, and Japan, the effect on Bitcoin’s price may be immeasurable.