- The recent financial meltdown has caused Bitcoin to perform poorly
- Before the fall, BTC long/short ratios were extremely unbalanced and derivatives’ open interest abnormally large
- Liquid assets are first in line to cover margin calls
In the past month, Bitcoin lost 50% of its value following the stock market, oil, Treasuries, and even gold as the coronavirus continues to spread.
Central banks around the world have injected billions of dollars but the global markets are still taking a beating with broad falls across multiple sectors. This past week, bonds, US Treasuries, and gold also recorded sell-offs. The enormity of the sell-off has been quite large with several markets logging their largest single-drops in decades.
Gold and US Treasuries still emerged as the strongest performers, which faltered this past week. As for bitcoin, the digital gold, the new safe haven, it was down over 40% and 28% YTD. AT its lowest point, it was down 65% monthly and 50% YTD but since then has recovered sharply. Bitcoin’s YTD gains might still be better than equity markets, but its volatility is much higher.
Traders turn to uncorrelated or risk assets to shore up dwindling margins
Talking about the ongoing rout, Christopher Bendiksen Head of Research at CoinShares wrote that last week, the long/short rations on Bitfinex and CFD provider IG, were “unbalanced in favor of longs.” Also, the cumulative open interest on future exchanges were near all-time highs.
Over the last week, OI has fallen over 50%, with more than $850 million BitMEX longs have been liquidated in a massive margin-call cascade. Bendiksen said,
“When markets drop and levered positions start running out of collateral, other levered positions––especially those that are correlated to the falling asset––are often not available to be sold off to free up new collateral as this would realise losses. Instead, traders will turn to uncorrelated assets, risk assets, or other previously winning positions as sources of capital to shore up dwindling margins.”
This dynamic took place between gold and equities in October 2008 during the financial crisis where gold performed poorly during the sharpest fall phase of the market crash. The bullion correlated “much more closely than usual” with the stock market. At the end of that October, both gold and S&P 500 were down 17%.
In a Dash to Cash, All is For Sale
Bendiksen points out that in the time of crisis, all correlations tend towards 1 as in a liquidity squeeze, a flight to cash, everything is for sale.
Bitcoin isn't acting like a safe haven asset at all, rather tailing the stock market. It doesn't mean the digital asset will never be a safe haven, but that this status has yet to be set in stone. Also, not to forget, with gold being sold-off recently as well. Interestingly, “the 30-day correlation of daily logarithmic returns between gold and the S&P 500 has flipped from -68% to 17%”, as noted by Bendiksen also.
As such, “In such an environment it would be extraordinary for a relatively tiny asset like Bitcoin to retain its value while even the safest of assets are looking vulnerable,” said Bendiksen.
Going forward, there’s no knowing what will happen. But last time, “gold fumbled its way into the 2008 crash, when the dust finally settled, and emerged as a very clear winner.”
As for bitcoin, it’s the crypto asset’s first time. And when the sellers run out, prices will stabilize. Also, even such deep losses haven't been unprecedented for the leading digital asset.
During this time, Bitcoin’s fundamentals didn't change, it “remains an independent, uninflatable monetary system whose units are unconfiscatable and not subject to bail-ins.” And no more than 21 million BTC could ever be created or confiscated, as such Coin Shares “remain as confident as ever in Bitcoin’s long-term value proposition.”