by Is Crypto Volatility a Feature or a Bug?
In the world of cryptocurrency, the debate surrounding volatility is ongoing. Miguel Kudry, CEO of L1 Advisors, delves into the performance of cryptocurrencies and their relationship with current market conditions. This exploration sheds light on whether the volatility inherent in crypto markets is a flaw or an advantage.
Market Turmoil and Its Impact on Crypto
On Monday, August 5, the Japanese Nikkei experienced a staggering drop of over 12%, marking its worst performance since 1987. This plunge followed concerning remarks from Japan’s central bank regarding potential interest rate increases. The market turmoil stirred fears of a U.S. recession and led to speculation about Federal Reserve rate cuts, triggering a global capital market panic as positions were unwound.
As investors sought quick liquidity, crypto markets felt the shockwaves, with Bitcoin and Ethereum seeing dramatic declines of 15% and 22%, respectively, primarily during the U.S. Eastern Time Sunday night. However, contrary to popular belief, this volatility is not a bug but rather a feature of cryptocurrency markets.
The Unique Liquidity of Crypto Markets
Unlike traditional markets, crypto markets operate without circuit breakers, offering an always-on, globally accessible platform for trading. This unique characteristic often positions cryptocurrencies as the first source of liquidity during times of panic. As demonstrated on that fateful evening, crypto became one of the few assets investors could liquidate, leading to a stabilization of Bitcoin and Ethereum prices by the time the U.S. stock market opened on Monday.
Reliability of Digital Assets Compared to Traditional Finance
During the turmoil on August 5, many online brokerages, including Schwab, Fidelity, Robinhood, and Vanguard, experienced outages or maintenance, preventing countless investors from accessing their portfolios. In contrast, Bitcoin has maintained an impressive uptime of 99.98918% throughout its existence, while Ethereum has never gone offline. This reliability underscores the advantages of digital assets, especially when traditional financial systems falter.
The Shift Towards On-Chain Assets
As more asset classes transition to crypto rails, the always-accessible nature of digital assets will become increasingly vital. Early adopters of these on-chain assets are likely to find arbitrage opportunities between on-chain and off-chain markets. A recent report from Bank of America highlights this shift, noting that younger investors tend to favor crypto and alternative investments over traditional equities.
Reducing Volatility Through Increased Accessibility
In times of uncertainty, the availability of an investor’s portfolio can mitigate panic across all asset classes, including crypto-native tokens. An analysis by Amberdata suggests that the dispersion of volatility across different regions significantly impacts price movements based on market openings and closings. This implies that greater access to crypto markets can help stabilize prices during critical periods.
Dynamic Nature of Crypto Markets
Earlier this year, during escalating geopolitical tensions, the tokenized version of gold, PAXG, traded at a premium of 20% over its closing price. Such price swings highlight the agility of crypto markets compared to more rigid traditional markets. The trading volumes for PAXG typically peak over weekends, especially on Sundays, reflecting the dynamic nature of cryptocurrencies.
Conclusion: The Future of Crypto
In conclusion, the volatility of crypto markets and on-chain assets during turbulent times emphasizes their unique characteristics, setting them apart from traditional markets and off-chain assets. The always-on nature of crypto ensures accessibility even when traditional markets are in disarray, providing crucial liquidity when needed. As more assets move to on-chain rails, this accessibility will likely become the new standard for a generation of investors seeking reliability amidst uncertainty.
Insights for Advisors: Understanding SEC Filings
In the “Ask an Expert” section, Kevin Tam from Raymond James Ltd. discusses how institutional U.S. Securities and Exchange Commission (SEC) filings can serve as a valuable resource for advisors. These filings, including SEC 13F and SEDAR in Canada, provide insights into the investment strategies of large institutional managers, helping advisors identify successful strategies and market trends.
Digital Assets in Institutional Portfolios
As pension funds and banks begin to incorporate Bitcoin into their portfolios, this signifies a shift toward embracing digital assets. For instance, the State of Michigan Retirement System added $6.5 million in Ark 21Shares Bitcoin ETF in the second quarter. Notably, Canadian banks like TD Waterhouse and CIBC World Markets have also included Bitcoin ETFs in their recent filings, collectively holding $26.6 million in these assets.
The Rise of Spot Bitcoin and Ethereum ETFs
With the introduction of spot Bitcoin and Ethereum ETFs in early 2024, digital asset investing has reached new heights. Total fund assets for spot Bitcoin ETFs have surged to around $62.3 billion, while the spot Ethereum ETF saw a remarkable inflow of $17 billion within just a few weeks. These developments enhance accessibility and legitimacy for investors, marking a significant evolution in the digital asset landscape.
As the financial ecosystem adapts to the realities of digital assets, understanding these dynamics becomes essential for advisors and investors alike.
