F. Scott Fitzgerald said “the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Bitcoin is the embodiment of this idea in markets, and why I suspect many in finance and business journalism dismiss its connections to the economy and other major asset classes. They write it off as a bizarre offshoot of finance more akin to a casino than an asset class. While that is true for most of the tokens, it is not for bitcoin. Viewing the King Crypto as a completely random roulette wheel that’s detached from traditional financial markets and the economy is a mistake.
Right now bitcoin is signaling that volatility is on the way. To see why, one has to hold the ostensibly opposing ideas of bitcoin as a risk asset and also a store of value, at the same time.
Bitcoin is indeed much closer to a roulette wheel than just about anything else in traditional markets, but for enough of its investor base, it is a wager on a specific series of events happening. The likelihood of those events is very low, hence the sluggish adoption, risk of investment, and potential reward if bitcoin becomes widely accepted as a store of value. As evidenced by its unprecedented, astronomic volatility, bitcoin is extremely risky. Its trading history since becoming a household name reflects its nature as a risk asset: peaking in 2017 right before the stock market’s frothiest peak of the bull market yet, breaking down ahead of the S&P 500’s epic 4Q18 selloff, and gaining steam again this year just as the VIX dropped back to the bottom of its 2-year range.
But wait: bitcoin also trades like a safe haven.
It surged this year as the U.S-China trade war was looking like it might turn into a currency war, the Fed was reversing course, and the amount of negative yielding debt was mounting across the globe. As this backdrop fell into place,…