A Change in Cryptocurrencies | Looking for Alpha


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Cryptocurrencies have been in the spotlight lately. Bitcoin (BTC-USD) is down nearly 50% from its peak, and the future looks much less certain than it did a year ago. We were able to identify the change in market dynamics early on, and I want to show you how we did it.

Narrative and drivers

I guess I should spend a few words here admitting that I never really “understood” the history of crypto. I saw the potential of blockchain technology, but felt it was grossly overstated when people were talking about it. It felt more like a small but significant step to me, whereas many people saw it as something closer to the discovery of fire.

Fine. A lot of people who are probably both smarter and better educated on this subject disagreed with my opinion – and that’s a combination you have to respect! When you find yourself on the wrong side of an argument like that, it might be best not to push that argument too hard.

I think we’re probably headed for a crypto apocalypse, at least if quantum computing lives up to a fraction of what seems to be the potential. We could really wake up one morning and find that all the encryption in the world is broken… so there’s that to consider.

There’s also the fact that many (not all) of the loudest and most vocal defenders of cryptocurrencies seem to understand nothing at all. There are some crazy built-in neo-Marxist narratives, anti-Fed rants, and just general stupidity. A lot of people who have had success with these things just got lucky buying early (and more power to them…maybe they saw something the rest of us missed), but that kind of luck doesn’t translate into insight.

Volatility is the challenge

All markets are, arguably, patterns of trust on some level – things are worth what we agree they are worth, and someone will be the last one standing when the music stops. But it’s been hard to see much of the narrative as anything other than an effort to prop up coins, much like we’ve seen with other assets as they hit valuations out of touch with reality.

I never saw the potential of the current coin crop as a store of value or medium of exchange. I realize that Paul Tudor Jones recently and verbally said the opposite – that bitcoin is an inflation hedge and a solid store of value, but unless I’m missing something, that’s a no-no. sense. Given how volatile these things are, it’s hard to imagine paying your rent with something that could be worth 50% more or less next week than it is today.

I guess the key takeaway here is that I had a fundamentally bearish bias, as many of these coins saw jaw-dropping gains of thousands of percent. So what are you doing? If you are a disciplined trader, you focus on price action and ignore your fundamental reserves. After all, my repeated caveat of “unless I’m missing something” isn’t just an empty phrase – maybe I’m really missing something.

Regime change

One of the oft-repeated ideas here is that cryptos provide risk diversification. In other words, own your stocks and the cryptocurrency can be a nice uncorrelated hedge.

Several recent articles have examined this idea, with the conclusion that the volatility of these instruments destroys their value as a hedge. Moreover, whatever value they had was thanks to their stratospheric returns, meaning they brought significant juice to a portfolio, even in a very small allocation. (This paper is a good read, but you can certainly find more.)

Sometimes looking at price trends can give us insight that researchers miss. We have seen, with crystal clarity, that bitcoin’s behavior changed immediately after the Covid-induced stock sell-off in early 2020. When stocks rallied, bitcoin fell out of step with stocks and that didn’t happen. hasn’t changed.

I have repeatedly told our MarketLife members that cryptos trade “like a risky asset”. (Here’s a lagniappe for persevering this far in this post: there seems to be a prominent relationship between stocks and cryptos—stocks have led to many key turning points. It shouldn’t be too hard to find something to see with that…)

Here’s a quick check of this diet change. The chart below shows the percentage of the last 100 trading days that the S&P 500 and Bitcoin closed in the same direction. It’s a little subtle, but it’s also real: before 2020, the relationship hovered around 50%. After the Covid rally, around 63% of the days see a close in the same direction.


It’s a quick and crude way of looking at the relationship, but it does indicate a change, and we think that change is important. Of course, the real question is what happens next, and we’ll be watching this relationship closely in the months ahead.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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