Cryptoverse: The British Pound Fiasco Boosts the Appeal of Bitcoin Hedging

Oct 25 (Reuters) – As a developed country, you know your currency is in trouble when investors start hedging with bitcoin.

After brief British Prime Minister Liz Truss unveiled her mini-budget on September 23, filling financial markets with dread, a portion of investors moved away from the pound and into cryptocurrency.

Trading volumes between bitcoin and the pound jumped 233% in September from the previous month, according to data from research firm CryptoCompare, while trading between the cryptocurrency and an equally battered euro also jumped 68%.

“This was the first time we’ve seen such a significant increase in (bitcoin) volumes for a developed country’s currency,” said Ed Hindi, chief investment officer at Tyr Capital.

On the Monday following Friday’s fiscal shock, when the pound fell to an all-time low against the dollar, trading volumes between the pound and bitcoin hit a daily high of 846 million pounds (955 million dollars), according to market data firm Kaiko. To research.

Meanwhile, bitcoin volatility is near an all-year low. In contrast, U.S. safe-haven bond volatility is near its highest since March 2020, as measured by the ICE BofAML U.S. Bond Market Option Volatility Estimate Index. (.MOVEMENT).

In fact, over the past month of market turmoil, US Treasuries have been just as or more volatile than bitcoin, according to data from Refinitiv. Bitcoin and the US 10-year note are now hovering around 21, according to a measure of realized volatility, while in early September, bitcoin’s volatility was more than double that of the bond, at 65. against 31.

“ESCAPE FROM THE CRISIS”

In bitcoin’s early days, a key selling point was its potential protection against currency depreciation and inflation. This narrative began to unravel as greater institutional adoption meant that cryptocurrencies traded more in parallel with traditional risky corners of financial markets.

So, are investors ready to bet on bitcoin as a hedge again?

Pound volumes echoed similar cases of investors jumping into bitcoin when fiat currency came under pressure, including in Russia and Ukraine this year.

Experts pointed to the relative ease for retail investors to buy bitcoin, rather than entering the gold or forex markets, as one of the factors driving the trend.

“Bitcoin has always been less of a ‘flight to safety’ and more of an ‘escape from crisis’ asset, even though the pound is nowhere near as weak as the rouble,” added Ben McMillan, chief investment officer. at IDX Digital Assets.

Some market participants said flows from the British pound were also driven by sophisticated traders taking advantage of arbitrage opportunities resulting from changes in bitcoin’s price.

One bitcoin bought nearly 19,000 pounds on September 27, its highest level in six weeks, from around 17,000 pounds on October 24.

BITCOIN PRICE

Bitcoin is not a safe bet. Clearly.

The world’s largest cryptocurrency has fallen more than 58% this year, while traditional safety plays gold and US bonds (.MERG0Q0) are down around 10% and 15% respectively, the pound lost 16% and the S&P 500 (.SPX) fell more than 21%.

However, bitcoin has stabilized somewhat in recent weeks, hovering roughly around the $19,000 mark.

Trading volumes between bitcoin and the pound are now back to levels they were before the mini-budget, analysts at CryptoCompare said, with the pound recovering ground after the UK government canceled its budget plans.

Some crypto watchers say the September surge was nevertheless a reflection of bitcoin’s enduring appeal as an asset outside of traditional finance.

“The large outflows from GBP to BTC imply that investors see value in having decentralized, incorruptible, capped money as an alternative to central bank and government-backed currencies,” CoinShares researchers said.

($1 = 0.8856 pounds)

Reporting by Lisa Pauline Mattackal in Bengaluru; Additional reporting by Alun John in London; Assembly Pravin Char

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