In the rapidly evolving landscape of cryptocurrencies, a persistent question arises: Is the volatility inherent in crypto markets a feature that enhances its appeal, or is it a bug that raises concerns for potential investors? In this exploration, Miguel Kudry, CEO of L1 Advisors, delves into the performance of cryptocurrencies amidst varying market conditions, while Kevin Tam from Raymond James Ltd. provides insights into institutional U.S. Securities and Exchange Commission filings, shedding light on the implications for advisors and investors alike.
– Sarah Morton
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In Tumultuous Times, Volatility in Crypto Is A Feature, Not A Bug
The global financial landscape can be precarious, as evidenced by the sharp decline of the Japanese Nikkei index on August 5, which plummeted over 12%, marking its most significant drop since 1987. This dramatic shift was triggered by unsettling comments from Japan’s central bank regarding possible interest rate hikes, which sent ripples of concern throughout the global markets. Investors were left grappling with fears of a potential U.S. recession, leading to speculation about Federal Reserve rate cuts. Such uncertainty disrupted the Japanese carry trade—an investment strategy that economists at TSLombard estimated to be worth approximately $1.1 trillion—resulting in widespread panic across capital markets as positions were hastily unwound.
In the wake of this turmoil, crypto markets reacted swiftly. On a Sunday evening, investors flocked to cryptocurrencies as a fast route to liquidity, causing significant drops in the prices of major digital assets like Bitcoin and Ethereum, which fell by 15% and 22%, respectively. Much of this decline occurred during the early hours of U.S. Eastern Time (ET). However, contrary to the prevailing narrative that volatility is a negative aspect of crypto, it can be argued that this volatility is, in fact, a vital feature of these markets.
Unlike traditional markets, crypto operates without circuit breakers, allowing for continuous trading around the clock. This always-on, globally accessible nature of crypto markets often makes them the first point of liquidity during times of market distress. For investors looking for immediate exits, cryptocurrencies may provide the only viable option, as evidenced by the events of that Sunday evening. By the time U.S. stock markets opened the following morning, both Bitcoin and Ethereum had rebounded by approximately 10% from their respective lows.
Crypto markets have consistently demonstrated their ability to provide liquidity and accessibility, even amidst the most tumultuous times. On the same day of the Nikkei crash, several prominent online brokerages, including Schwab, Fidelity, Robinhood, and Vanguard, experienced outages or maintenance issues, leaving numerous investors unable to access their portfolios or execute trades. Schwab attributed its outage to a combination of heightened trading volumes and a technical issue with a key vendor, illustrating the challenges and lack of transparency in traditional financial systems. In stark contrast, Bitcoin has maintained an impressive 99.98918% uptime throughout its existence, while Ethereum has never gone offline, showcasing the reliability and resilience of digital assets even when conventional financial systems falter.
As other asset classes begin transitioning to crypto rails, often referred to as on-chain, they stand to gain from the continuous accessibility that digital assets offer. Early adopters of these technologies are likely to exploit arbitrage opportunities that arise between on-chain and off-chain markets. Over time, this seamless accessibility is expected to become the norm for a new generation of investors who have become disenchanted with traditional market structures. A recent report by Bank of America underscores this shift, noting that older investors tend to hold more traditional equities, while younger demographics are increasingly favoring crypto and alternative investments.
During periods of uncertainty, the enhanced availability and accessibility of an investor’s portfolio can mitigate volatility and panic across all asset classes, including those native to crypto. An analysis conducted by Amberdata illustrates that “the dispersion of volatility across different regions underscores the significant impact of market openings and closings on price movements.” This insight suggests that greater accessibility could stabilize markets during critical junctures, providing a buffer against extreme fluctuations.
For instance, earlier this year, as geopolitical tensions escalated between Iran and Israel, the tokenized version of gold, PAXG, traded at a staggering 20% premium over its closing price on April 12. Such sharp price movements highlight the contrasting flexibilities of traditional versus crypto or on-chain markets. This volatility is further illustrated by PAXG’s trading volumes, which typically surge over weekends, particularly on Sundays, emphasizing the dynamic nature of crypto markets compared to the more rigid structures of traditional finance.
Source: @Kaledora, who wrote a whole X thread on this subject.
Conclusion
The intrinsic volatility of crypto markets and on-chain assets, especially in times of turmoil, highlights the distinctive features that set them apart from traditional markets and off-chain assets. The perpetual nature of crypto trading, free from circuit breakers, ensures that these markets remain accessible even when traditional financial systems experience disruptions, offering liquidity exactly when it is most needed. As an increasing number of assets transition to on-chain frameworks, this availability will become even more crucial, potentially leading to a reduction in panic and volatility across the broader global financial ecosystem.
Ask an Expert
Q. How can investors use the SEC 13F or SEDAR filings for due diligence?
Investors can utilize SEC 13F filings and Canada’s SEDAR (System for Electronic Document Analysis and Retrieval) as vital research tools. These filings provide insights into the investment strategies and portfolio holdings of large institutional managers, often referred to as “smart money.” By analyzing these filings, investors can identify successful strategies, spot emerging market trends, and ascertain where funds are allocating their capital. Moreover, from a regulatory compliance perspective, these disclosures enhance investor confidence by increasing the transparency and integrity of traditional financial markets.
Q. Why would a pension fund or bank add bitcoin to their portfolio?
The inclusion of Bitcoin by institutional players signifies a notable shift toward embracing digital assets within traditional investment strategies. This movement is largely a response to low interest rates and inflationary pressures, offering diversification and potential for superior returns. For example, the State of Michigan Retirement System allocated $6.5 million to the Ark 21Shares Bitcoin ETF in Q2. Additionally, major Canadian banks like TD Waterhouse Canada, CIBC World Markets, and National Bank have integrated Bitcoin ETFs into their latest Q2 13F filings. Collectively, these banks hold approximately $26.6 million in these spot Bitcoin ETFs. This trend underscores the growing recognition of Bitcoin as a long-duration, institutional-grade asset capable of delivering asymmetric return profiles, maintaining significant upside potential while limiting downside risk.
Q. What’s the latest buzz around spot Bitcoin and spot Ethereum ETFs?
Recently, spot Bitcoin and Ethereum ETFs have gained traction, with their availability in early 2024 leading to substantial investments. Currently, total fund assets across the ten spot Bitcoin ETFs amount to approximately $62.3 billion. Additionally, the introduction of the spot Ethereum ETF has simplified the investment process for individuals looking to enter the digital asset market via traditional financial channels. In just a few weeks, the spot Ethereum ETF experienced net inflows totaling $17 billion across eight ETFs. This development marks a significant evolution in digital asset investing, enhancing both accessibility and legitimacy for a broader range of investors.
– Kevin Tam, Digital Asset Research Specialist & Senior Branch Compliance Supervisor, Raymond James Ltd.