Why has Bitcoin plummeted? We may need to rethink the hedging nature of Bitcoin

Since Satoshi Nakamoto created Bitcoin in 2008, Bitcoin's peer-to-peer, non-regulatory and other features have made everyone think that this is an asset that runs completely counter to traditional assets. Although we think that Bitcoin has no useful value support so far, as Bitcoin is gradually known to society, the distribution of coins is becoming more and more dispersed, and there are certain costs in terms of production and energy consumption, etc., acting together The price of Bitcoin is gradually rising.

Why has Bitcoin plummeted? We may need to rethink the hedging nature of Bitcoin

In the course of this eleven years, Bitcoin holders have set a lot of labels for Bitcoin, such as payments, dark web transactions, digital gold, and so on. But unfortunately, with the development of blockchain technology, Ripple has appeared in the payment field, and digital currencies such as Libra that apply blockchain technology will appear. Litecoin and many privacy coins such as Monroe and ZCASH have also replaced Bitcoin as the mainstream payment currency in the dark web.

With the good performance of several geopolitical crises in the first half of 2019 and 2020, the hedging nature of Bitcoin is promoted, and the argument that Bitcoin is called "digital gold" is also increasing. But unfortunately, in the global asset market black swan incident caused by the new crown virus in 2020, Bitcoin did not appear to be as promising as gold. Instead, it quickly fell from around $ 9,000 to a minimum of $ 3,800 after the derivative crude oil crisis detonated. Is the myth of Bitcoin safe-haven broken? Still, this story is similar to the story of payment and dark web transactions, it's just a story. Next, we will explore the hedging properties of Bitcoin from multiple points of analysis.

Liquidity depletion

As we all know, the core point of all products that can be selected by the trader as a trading target in the market is that they must be highly liquid. Conversely, there may be a problem of excessive impact costs when opening a position or closing a position, and it is more likely that there will be suffocation when extreme liquidity is not enough to be robbed by other users. It's a pity that Bitcoin's current liquidity does not meet the standard of transaction. Although in the bitcoin market, the daily turnover is close to 50 billion U.S. dollars (Coinmarketcap data, without considering the exchange volume), but if we observe the indicators of whether traditional financial markets buy bitcoin, we can see that CME bitcoin futures positions The volume has continued to decline this year, which also means that there are not many institutional traders who use Bitcoin futures as a hedging means through compliant futures exchanges.

In addition, Coinbase's USD is continuously discounted against the USDT trading pair, which means that compliant users on Coinbase are selling bitcoins instead of buying them on the net. In contrast to the Bitcoin bull market in early 2019, the core is the continuous premium of Coinbase, which means that both giant whales and institutional investors are entering the market. The depletion of liquidity in the interaction between bitcoin and traditional markets has led to the fact that hedging funds will not consider bitcoin first when encountering a crisis, so the basis for naturally discussing the hedging nature of bitcoin does not exist.

Relative price is too high

This round of bitcoin's trend is very interesting. At the beginning of the year, driven by the crisis of the Iranian war in the United States, bitcoin quickly climbed from around 7,000 US dollars to around 9,000 US dollars. (To be outlined in the next section), the bigger reason is the story of the hype "reducing production" on the floor. Theoretically, a reduction in output would lead to an imbalance between supply and demand, which would increase prices. But unfortunately, "reducing production" in the currency circle is just a gimmick for speculation.

We assume that comparing altcoin and bitcoin headed by Ethereum, the bull market in early 2019 is obviously the increase in bitcoin over altcoin. This phenomenon can be understood as the first start of bitcoin due to the influx of foreign funds. The altcoins then followed, essentially stimulating internal causes from external factors. However, this wave of rises at the beginning of this year is completely the opposite. The altcoins such as BSV, BCH, ETC, and ETH were the first to start. Bitcoin slowly kept up, and the increase was not as good as double or even triple these currencies. The hot spot in the follow-up market is also shifting to XTZ, LINK, such undervalued value coins, rather than the bitcoin that will be “reduced”.

This shows that this round of market is self-heavy on the market. From the perspective of the market, internal factors cause external factors, and there is no new capital inflow.

For the funds that want to enter the market, the high level of 9,000 US dollars is about 1.4 times the low point near the 6800 US dollars. The risk-reward ratio of continued admission is not appropriate, let alone ambush the so-called hedging demand. For bookmakers and predators in the market, this round of market is mixed with a lot of leverage, so that futures positions continue to be high. On the one hand, the futures positions were closed profitably on the one hand, and the funds needed to pull up were too much pressure. On the other hand, the long-term sentiment was strong, and the short-to-short ratio once reached 3: 1, and the annual rate of long funds exceeded 100%. It is clear that the odds of going down are higher than going up. Then it is obvious that the next trend is to break down.

For them, the risk aversion demand brought by the influx of funds is an uncertain proposition, but the plunge in the market caused the harvest futures positions to be deterministic. Between certainty and uncertainty, I believe that every rational economic person will make a choice.

Anticipation

In our opinion, the rise and fall of assets are two cores, one is the game expectation and expectation, and the other is the odds. These two points are well understood. Assuming that the current relationship between the United States and Iran is very rigid, it may trigger a local war. Investors will bet on Iran and the United States at a suitable odds. There may be three situations in the next situation. There is no war, no war, no war, but the intensity is much greater than expected. For example, Trump ordered the missile launch to kill the leader of the Revolutionary Guard. The occurrence of the first and second situations also means that the investor's game expectations have been fulfilled, and the due returns are obtained according to the odds of the chips placed. However, if the third situation occurs, it also means that an unexpected event has occurred. Once this unexpected situation occurs, more investors pursuing certainty will enter the market, and investors who have previously placed bets will receive more money. To a higher gain or loss than the expected odds, this is an unexpected event.

The Black Swan incident can be broadly interpreted as an unexpected event. Naturally, the death of the leader of the Revolutionary Guards led to the plunge of Bitcoin, as well as the full-scale outbreak of the new crown virus. However, the intensity is completely different between the two. The US-Iraq war is a long-lasting thing. The use of force by the United States is also expected by some people. Then there is a reason for funds to enter the bitcoin market to play a bitcoin avoidance when the war really starts If the bitcoin price is very low at that point in time, the odds of the game are sufficient, so the bitcoin has risen more than expected, and whether the inflow of funds after the rise is not important.

But the new crown virus is not the same. After the spread in China, only a few countries such as Japan and South Korea have a small number of infections. Just when everyone thinks that the virus has been controlled by epidemiology, the virus is in Europe, Iran, the United States, etc. Regional outbreaks. This is a completely unexpected event. An analogy to Iran ’s geopolitical crisis is to kill the leader of the Revolutionary Guards. Iran fired missiles to bomb US territory and even triggered World War III. This kind of unexpected event is unknown to any investor, and this kind of game for the unknown is the most terrifying.

Then the first reaction of the assets is to flood into US debt and into the Japanese yen, and then go to game the safe haven assets on the premise of ensuring their own safety. And even if the game is to choose a variety that they are familiar with, rather than a strange, illiquid Bitcoin. Therefore, when a highly intense and unexpected event occurs, we cannot expect Bitcoin to have an instant chain reaction like gold. This is because from the perspective of the capital side's trading operations and trading experience, the first choice must be familiar It is also a human instinct to have a widely recognized risk-averse variety.

Maybe a risky asset

Having said all this, there are several reasons why Bitcoin is not a safe-haven asset. Of course, in addition to these reasons, there are many old-fashioned reasons that will not be repeated one by one. Since it is not a safe-haven asset, what kind of assets does Bitcoin belong to? Personally, it is considered a risk asset. Here are a few points.

First of all, bitcoin actually has some lagging linkage with US stocks last year and this year. Although there is no statistical significance for the time being, this is based on our observations based on charts and event-driven observations.

Second, bitcoin is subject to the funds in the market, that is, to enjoy the nourishment brought by the release of water by the central bank, which depends on two parts. One is that when the market is liquid, the funds will tend to allocate some high-risk high-return For example, many university foundations have allocated a certain amount of cryptocurrency as an alternative asset allocation, and many high-net-worth technology company executives also hold a certain amount of bitcoin. This is because the release of water means inflation, but when the real economy is not so good, the rise in asset prices cannot outperform inflation, and markets and professional investors will look for high-risk, high-yield products, such as bonds, etc. Bitcoin, the asset that has increased the most in the past ten years, naturally falls into this category. The second part is the hype attribute of Bitcoin. There are only 21 million bitcoins in total. Compared to the endless stream of fiat currencies, listed companies with opaque fundamentals, and commodities whose output does not currently have an upper limit, the total amount of Bitcoin is constant. The characteristic of constant output is simply too suitable for hype. And whether it is decentralization, or hedging logic, etc. have given speculators a great story to pyramid the next entry fund. When Bitcoin has such a good hype attribute, when the market is liquid, there will be a large number of users holding the dream of getting rich. The resonance of water release, professional investors, and retail investors also gave birth to the bull market at the end of 2017.

Bitcoin is still a young asset. Compared with commodities, the national sovereign credit currency is short in 10 years, and it is not as good as a hundred-year listed company in the US and a 30-year technology company. Perhaps it is not appropriate to define his asset attributes in a long-term latitude based on the current event-driven and ups and downs. This article hopes to help bitcoin investors more clearly understand what the assets they invest in are. It is hoped that investors will take a rational view of the concept of hedging. In the long-term time frame, these little things are just appetizers. The future of Bitcoin is very long. Let us wait and see.