British pound crisis increases interest in using bitcoin as a hedge

After Liz Truss Unleashes Her Mini Budget On Sept 23, Investors Flee Pound And Head To Cryptocurrencies.

As a developed country, you know your currency is in a position of concern when investors start to hedge into bitcoin.

After laconic British Prime Minister, Liz Truss released her mini-budget on September 23, filling financial markets with dread, a section of investors turned away from the British pound and focused on cryptocurrencies.

Trade volumes between bitcoin and the British pound rose 233% in September from the previous month, according to data from research firm CryptoCompare, while trade between the cryptocurrency and the also-battered euro jumped 68%.

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

On the Monday after Friday’s budget shock, when the pound fell to an all-time low against the dollar, trading volumes between sterling and bitcoin soared to a daily record of 846 million pounds ($955 million), according to market data firm Kaiko. Search.

Meanwhile, bitcoin’s volatility is near its all-time low. By contrast, US safe-haven bond volatility is near its highest level since March 2020, according to ICE BofAML’s US Bond Market Options Volatility Estimate Index.

In fact, during the past month of market turmoil, US Treasuries have been roughly as volatile as Bitcoin, according to Refinitiv data. Both bitcoin and US 10-year bonds are now hovering around 21, according to a gauge of realized volatility. In contrast, bitcoin volatility was more than double that of the bond in early September, 65 versus 31.

Escaping from the crisis

In the birthplace of Bitcoin, the main selling point was potential protection against currency devaluation and inflation. This narrative is starting to unravel as increased institutional dependency leads to more cryptocurrency trading with traditional risky corners of financial markets.

So are investors willing to bet on Bitcoin as a hedge again?

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

Experts have cited the relative ease of retail investors buying bitcoin, rather than entering the gold or foreign exchange markets, as a factor behind the trend.

“Bitcoin hasn’t always been so much a ‘journey to safety’ as a ‘journey out of crisis,’ although the pound is not as weak as the ruble,” added Ben McMillan, chief investment officer at IDX Digital Assets.

Some market participants said sterling’s inflows were also fueled by savvy traders taking advantage of arbitrage opportunities from bitcoin price changes.

Bitcoin bought almost 19,000 pounds on September 27, its highest level in the last six weeks, compared to 17,000 pounds on October 24.

Bitcoin price

Bitcoin is not a safe bet. Clearly.

The world’s largest cryptocurrency is down more than 58% this year, while traditional gold and US bonds are down 10% and 15%, respectively, the British pound is down 16%, and the S&P 500 is down. Down more than 21%.

Bitcoin has somewhat stabilized in recent weeks, although it hovers around the $19,000 mark.

CryptoCompare analysts said trading volumes between bitcoin and the British pound have now fallen to almost pre-mini-budget levels, with the pound bouncing back after the British government reversed its fiscal plans.

However, some crypto watchers say the September rally reflected bitcoin‘s continued appeal as an asset outside mainstream finance.

“Large sterling outflows to bitcoin suggest that investors are seeing the value of having decentralized, high-ceilinged, incorruptible money as an alternative to currencies backed by central banks and governments,” CoinShares researchers said.

(dollar = 0.8856 pounds)

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