Bitcoin, volatility and safe havens

So much for the “safe haven” theory…

Previous bitcoin bull runs have been accredited to turmoil and fear in financial markets. Much has been written about the cryptocurrency replacing gold as a “safe haven” (which I don’t agree with – it’s more of an “appealing alternative”), as pundits point to the jumps after the Brexit vote and the Trump election.

What, then, explains the bull run when Wall Street’s “fear index” is at its lowest point in over 20 years? Bitcoin is up 75% so far this year, and 26% so far this month. Among the reasons given are the increase in demand in Japan, in response to the recent legislation legalizing bitcoin as a “payment method” (but not yet a currency). The renewed possibility of a bitcoin ETF approval is also cited (although it is unlikely), although a stronger influence could well be FOMO (fear of missing out).

This is quite spectacular:

coindesk-bpi-chart

Maybe the “fear index” is wrong? Does anyone really believe that uncertainty and risk are at minimums?

The VIX index, as it is called, measures volatility. The assumption up until now has been that volatility = fear, and when things are going belly up, volatility peaks. What if volatility no longer measures fear? What if market liquidity, speed, derivatives and algorithms have ruptured the historical relationship?

I’m not a market expert, but I can’t see how volatility wouldn’t go up in times of trouble. So I find this completely perplexing.

One thing to bear in mind – just because bitcoin is not at this stage relying on its “appealing alternative” status, does not mean that it loses it. The fundamentals and characteristics that make it interesting have not gone away. It’s just that it has other good stuff going on.

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