As Bitcoin skyrocketed last year, the crypto crowd (as well as a sizable contingent of otherwise sane people) bent over backwards to try and explain how Bitcoin is akin to gold.
And you know, if you’re going to go out and try to compare Bitcoin to gold, I guess it makes sense to approach it that way. That is, if you’re going to compare Bitcoin to gold, it’s probably best to make a list of the reasons why the two are alike because if you do the opposite (that is, make a list of all the reasons Bitcoin and gold are not alike) we’ll be here all fucking day.
So thanks to all of those people who endeavored to explain why Bitcoin is like gold because you inadvertently saved everyone a lot of time by approaching it from that angle.
Needless to say, Bitcoin is not gold and if you want an explainer on why it’s not gold, please see here.
Amusingly, anecdotal evidence suggests that as Bitcoin plunged this month, investors were scrambling to buy gold, apparently on the assumption that a collapse in cryptos might well bode poorly for risk assets in general.
That brings us neatly to a new Deutsche Bank note which suggests that far from a safe-haven, Bitcoin and cryptocurrencies more generally represent the “new frontiers of risk-taking” and in that sense, they are more like short VIX ETPs than they are gold.
“The current ‘triple-low environment’ of low-interest rates, low spreads, and low volatility has given birth to new asset classes like implied volatility (ETFs selling volatility), and cryptocurrencies,” the bank’s Masao Muraki, writes, adding that “the prices of both asset classes have plummeted and rebounded simultaneously and in 2018, correlation between Bitcoin and VIX has increased dramatically.”
Over the past year, the calls have grown louder with regard to the feedback loop embedded in markets thanks to vol. selling and systematic strats. Technically speaking, the worry is that thanks to the low starting point, a nominally small spike in volatility could force levered and inverse VIX products to panic buy VIX futs into said spike, thus exacerbating the situation and forcing the systematic crowd to deleverage into a falling market. In his year-ahead outlook, JPMorgan’s Marko Kolanovic suggested that this dynamic (which he calls “quantitative exuberance”) is one reason why we don’t need to see “irrational exuberance in the ‘tech bubble’ sense” in order to get a crash. To wit:
