Bitcoin’s Role as a Hedge Against the Global Financial System Back in Question
As markets go through a rough time, along with the bitcoin, people are back to questioning the largest cryptocurrency’s role as a hedge against the macro disorder.
The same was said in March when bitcoin crashed along with the rest of the stocks, oil, gold, and other assets.
That time, the coronavirus pandemic rattled the markets that pushed oil futures into negative for the first time ever and bitcoin to $3,800.
Unlike the traditional markets, crypto markets don’t have any plunge protection, no circuit breakers to prevent the asset from plunging further.
However, crypto derivatives exchange BitMEX did prevent BTC from going to zero by shutting the exchange down because of a DDoS attack, and the digital asset only plummeted to $3,600 level on the platform.
This time again, as markets make a U-turn after flying high since the March crash, bitcoin followed suit.
According to on-chain analyst Willy Woo, this is because bitcoin is still finding its foot and isn’t big enough yet.
This is because BTC is a combo of a risk-on "new tech" startup growing exponentially and a digital age safe haven. It needs to exceed $1T cap to be considered a bag big enough to see it as a mainstream hedge. That's not very far away with an exponentially growing digital asset. https://t.co/nwZnkAIaWO
— Willy Woo (@woonomic) September 4, 2020
Additionally, the asset that has replaced cash as a reserve asset in the balance sheet of three companies in the past month wasn’t the only one to plunge.
Traditional safe-haven asset gold is down just the same. This week, the precious metal lost 3.8% of its value.
Does it mean the bullion is no more a store of value? Not at all!
As a matter of fact, Warren Buffett, for the first time ever, invested in gold after ditching his bank shares.
This move from the billionaire came after the yellow metal crashed hard during the March sell-off, just like it did in 2008 before surging upwards.
The same could be said for the digital gold, which is still a nascent asset class with a growing adoption rate and still down 50% from its all-time high, which means a lot more potential for a new peak.
Why the Pullback?
The flagship cryptocurrency briefly breached $12,000 on Tuesday only to drop to about $10,000 level on Wednesday. The asset has fallen 16% since Tuesday that puts in on pace for its worst two-day stretch since the second week of May.
“Part of the reason for the sell-off is technical in nature; its price broke below key support, confirming a head and shoulders pattern, which accelerated the decline,” noted research firm Delphi Digital.
The short-term pain in the crypto market has come amid the worst daily decline for the S&P 500 since early June and the largest one-day spike for the VIX Index in almost three months.
This sell-off, besides being technical in nature and mirroring the broader sell-off in traditional markets, is also because of the DeFi craze that was “overdue for a pullback.”
According to some like trader Crypto Whale, the digital asset can still go down to $3,500 and fill the CME gap, which has happened 99% of the time.
“I believe there's still a likely chance Bitcoin drops below $3,500 and fill the lowest CME gap before we see a real bull market,” he said.
Could this happen, sure, but will this happen, that’s to be seen. The market already saw it in March, and after falling momentarily to this level, it went back to $6,000 level the next day.
For now, bitcoin is struggling at the key psychological level of $10,000, having fallen under it today.
The fall in price had the open interest in CME bitcoin futures continuing its correction that started last week, shedding another 1000 contracts this week. While Leveraged Funds increased their shorts positioning noticeably this week as did the asset managers long.