Hedging Bitcoin with Pesos
The Mexican Peso is the fifteenth most traded currency in the world. Peso means weight, as it was originally backed by gold and silver. However, today‘s Mexican Peso only goes back to 1993 where it was recreated as an entirely new currency and artificially valued at 1000 old Pesos to 1 new Peso.
Bitcoin is the worlds first cryptocurrency — a decentralized form of peer-to-peer payment with no central control. It began in 2009 as the mysterious Satoshi Nakamoto mined the first ever block on the chain. However, the entity never circulated them. It was not until the influx of cryptocurrency exchanges appeared in 2016 did the currency gain true liquidity.
As of this writing, it takes approximately 134,000 Pesos (MXN) to buy one Bitcoin (BTC). Yet, the Peso (MXN) is commonly used as a hedge against emerging market investing — those countries with slower economies than the developed markets. The reason is high liquidity and good stability.
Over the past several months the Mexican Peso (MXN) has taken a hit do to fears centered around political change within Mexico and questions regarding free trade between Mexico, the United States, and Canada. Bloomberg predicts the decline will continue.
Meanwhile, Bitcoin (BTC) is also on a downward trend for the last few months. This puts into question the Peso’s (MXN) ability to hedge Bitcoin (BTC). However, both Bitcoin (BTC) and the Peso (MXN) are connected with emerging markets — especially Venezuela.
Venezuela Crisis and Bitcoin
2008 marked a series of disasters for Venezuela — both social and economic. Their currency, the bolivar, is currently so inflated that it takes 100 of them to equal two-cents in U.S. currency. As a result, many in Venezuela are mining and using Bitcoin (BTC) for daily transactions.
Forbes reported that Bitcoin users in Venezuela totaled 450 in August 2014. In November 2016, that number climbed past 85,000. Even humanitarian aid to that country is being made in Bitcoin — highlighting a major benefit for cryptocurrency. That is one only needs a mobile phone to send and receive them.
“Another major positive to Bitcoin for a country in disarray is that its government can’t control the value of it.” — Kevin Rands (CEO Health Networks)
Since Bitcoin (BTC) is not under government control, many nations fear it. However, those living under governments with currency in crisis can look to Bitcoin (BTC) as a safer store of value — either legal or illegally.
Emerging Markets and Bitcoin
Before 2016, many emerging market investors used the Mexican Peso (MXN) as a hedge. Especially when investing in assets related to Central and South American countries. The reason is that the Peso (MXN) is the strongest of the emerging market currencies and is likely to be much more stable in fluctuation.
After 2016, Venezuela has proven that as government backed (fiat) currencies collapse, those living under them will turn to alternative forms of trade. Today, the most feasible fiat currency alternative is Bitcoin (BTC) with other cryptocurrency not far behind. Thus, in some aspects, Bitcoin (BTC) can be a hedge against fiat currency in general. The reason is what we learned from Venezuela. If a country has electricity and a cellular network, those living there can easily trade in Bitcoin (BTC).
If the people loose faith in their home currency they can switch to Bitcoin with little fuss. This is how the Mexican Peso (MXN) becomes a means to hedge Bitcoin (BTC). If emerging markets are doing well, one would expect the Peso (MXN) to rise some and Bitcoin (BTC) to drop. When emerging markets suffer, one can expect Bitcoin (BTC) to rise and the Peso (MXN) to remain stable with a slight fall.
As an example, MarketWatch is forecasting the Columbia Peso (COP) to be on an upward trend for the remainder of 2018. In June 2018, it climbed 4% against the U.S. Dollar. This at a time when Bitcoin (BTC) is loosing value.
In addition, Venezuela is offering a new currency called the Petro, a cryptocurrency backed by the natural resources of the country. However, it is also controlled by the government like traditional fiat. So far, it has not taken hold as anticipated by Venezuelan leaders. Bitcoin is still the currency of choice for people in that country.
Hedges and Randomness
Before anyone uses the Mexican Peso (MXN) to hedge Bitcoin (BTC), it is important to realize that the relation between Bitcoin (BTC) and emerging markets is just one of many variables affecting the price. French Mathematician Benoit Mandelbrot concluded that markets are driven by “wild randomness,” where things do not average out. Meaning that even if all variables are known there is still a large random element that remains unknown.
Consider that at time of writing, the Peso (MXN) and Bitcoin (BTC) are moving downward. Yet, the Peso (MXN) is more stable, gaining value on Bitcoin (BTC) as they move. Currently, one can buy considerable more Bitcoin (BTC) with the Peso (MXN) than just a few months ago. However, it is very difficult to pinpoint why this is occurring?
A hedge is built to protect against loss at the expense of potential profit but is not designed to cover a worse case scenario. For example, one buying Apple stock might purchase an option to buy Samsung stock in-case they bet wrong on the hottest new phone of the year. However, if a wildfire or some other natural disaster destroys a large percentage of the cell phone network, the hedge would not work.
An option gives the right but not the obligation to buy something at a future date based upon a pre-set price. This is the typical mechanism for hedging. However, it is never perfect — just better than a straight bet.
Conclusion
Bitcoin (BTC) has the potential to hedge trades from emerging markets and vice versa. It could even be a better hedge for these markets than the Mexican Peso (MXN) has been in the past. This makes the Mexican Peso (MXN) a front-runner to hedge Bitcoin (BTC) investing too.
However, be advised that this is far from proven. There could be many scenarios where both Bitcoin (BTC) and the Mexican Peso (MXN) move in the same direction at the same time. Regardless, it is an option that merits further exploration at a time when there is no clear hedge for Bitcoin (BTC) investing.
Thank you for reading.
