DAR Crypto Weekly — 2/28/20
Bitcoin — For Protection?
Market Overview
Digital asset prices were down for the second consecutive week with total industry market cap down 8.1% to $250.6B. Large-cap relative winners on the week were Chainlink (LINK -5.2%), Monero (XMR -6.3%) and Bitcoin (BTC -7.1%). Laggards in the large-cap category were Tezos (XTZ -18.8%), Bitcoin SV (BSV -18.7%), and TRON (TRX -11.6%). Other noteworthy positive movers across the industry were UNUS SED LEO (LEO -3.4%), Theta (THETA -3.7%), and Algorand (ALGO -5.7%). Other notable laggards on the week included Siacoin (SC -19.9%), Waves (WAVES -17.4%), and NEO (NEO -16.6%).
DAR Research and Events
Our co-founder Greg Cipolaro got tapped for a quote in Brad Keoun’s recent article for Coindesk regarding the recent stock market sell off and the connection to crypto (link). Just by chance, we had recently done a bunch of work around the issue whether Bitcoin was a “risk on” or “risk off” asset and have a lot of opinions on the topic. We’re going to devote most of our newsletter to the discussion of the topic and introduce some analysis on traditional markets.
Bitcoin — For Safety?
The saying “Bitcoin for safety” evokes strong imagery for those of certain viewpoints — safety from central banks, profligate governments, inept politicians, currency debasement, greedy bankers, and anything else presently bothersome. For many others, however, like financial institutions, institutional investors, and asset allocators, the matter is more practical than philosophical. While Bitcoin is presently pitched by many as “digital gold” for features like its fixed supply cap and declining supply growth rate, the question remained unanswered as to how Bitcoin behaved in real world “risk off” scenarios. The is what we sought to uncover in our recent report: Bitcoin — For Safety?
Given the growing global fears regarding COVID-19, which have seemingly spooked crypto and traditional market alike, we’re open sourcing our research report, so that the public may be better informed about what the asset has done or can do for multi-asset portfolios. A copy of our report can be downloaded here.
Traditional Markets Take a Dive
We’re going to preface our discussion with the current backdrop on equity markets, which have been been in a panic since fears about COVID-19 started to permeate the US. As a bit of a reminder, the S&P 500 set an all time high last Wednesday, February 19th. Since that time it has been nearly straight down with the S&P 500 registering a 15.2% sell off as of time of writing. We don’t want to minimize the impact that the virus has had already nor trivialize the potential it could have. This is a deadly, highly contagious disease. But we aren’t virologist or epidemiologist so we’re going to stay in our lane, so to speak.
Our observation is that the stock market is prone to swift and deep sell offs for a variety of exogenous events, like viruses (SARS), divisive political decisions (Brexit) and elections (Trump), acts of terror (9/11), and disasters, from man made errors (Deepwater Horizon) to nature induced (Fukushima). Statistically speaking, since the inception of the S&P 500 in 1957, there have been 49 drawdowns of 5% or more. Replicating the index back to 1928, there have been 60 drawdowns of 5% or more.
Traditional Market Drawdown — Bimodal Distribution
These drawdowns typically come in 2 flavors: 5%-20% drawdowns that happen with some regularity and deeper (20%-60%) more are most protracted drawdowns most associated with economic recession (consumer consumption decreases almost by definition). From this chart from JP Morgan Asset Management (presentation link), there were only 2 drawdowns of greater than 20% magnitude that were not coupled with recessions — the Cuban Missile Crisis and the 1987 “Flash Crash”.
It is with that lens that we look at Bitcoin. Can this asset protect diversified portfolios from “risk off” scenarios?
Bitcoin as a Risk off Hedge
The conclusions from our analysis are concise, but multifaceted. On multiday stock market drawdowns, Bitcoin exhibits slight daily positive returns, but ones that are well below normal average daily returns. Bitcoin only works as a hedge (generates positive returns) 54% of the time, while US Treasuries work 85% of the time, and gold works 69% of the time. On big one day moves downward in the stock market (-2 std dev moves), the data is clearer. Bitcoin has negative daily return on the average. Finally, on the intraday basis, we’ve anecdotally noticed Bitcoin’s increasing correlation as a risk off asset, but we’ve yet to formalize or quantify the impact.
We won’t spoil the entire report, so check it out here. We hope it helps educate and navigate the current turbulent waters.
