Cryptocurrency Derivatives Series: Bitcoin Perceived as Hedging Vehicle

The mounting geopolitical risk and tighter financial conditions in the US leading to global growth concerns and weakness in the currencies of major US trading partners. (September – December 2016).

Escalation of US and China trade tensions posing systemic risks to global economic growth and placing further pressure on the RMB. 

Contemplating the above macro conditions and on the back of the underlying price developments FX markets, the recent price volatility and the sudden spike in price are likely to have been prompted by short squeeze activities and mounting open interest of the Bitcoin Futures are the latest developments in bitcoin derivatives markets. 

This is majorly due to shorts are forced to square-off their positions (incurring a loss) as the underlying price increase.

While bulls managed to reclaim Bitcoin price to $13k mark levels as the financial institutions are infusing investments into the crypto industry, this has been the major driving force that the prevailing bull run of Bitcoin prices.

Another significant factor in the ongoing bullish price run may be increasing demand for Bitcoin as a hedge against macroeconomic uncertainty.

The open interest for bitcoin futures on CME has surged but by bit MoM basis. Open contract numbers have risen to a record-breaking 6,096 by the end of June. This is mainly due to the mounting demand from institutions and professional traders for the trade during the cryptocurrency avenues rallying to record highs in 2019.

The HFs note to investors points out that back in 2017, cryptocurrency markets and trading platforms have come up with better liquidity and stability, as additional products have been added in an attempt to tame the volatility of Bitcoin.

While volatility is the heart and soul of options trading. With the proper understanding of volatility and how it affects your options, one can profit in any market condition and applies to crypto options as well. 

It’s a feature of the low-inflation era that very few governments or central bankers want a strong currency. That’s just one reason why Bitcoin is doing so well. Strong currencies depress inflation, at least temporarily, and if their impact on competitiveness is exaggerated, it’s still enough to make them take the blame for jobs being lost to other cheaper-currency producers.

Very recently, Chamath Palihapitiya, a renowned venture capitalist perceives bitcoin is the best financial hedge against an uncertain global economy. He thinks buying bitcoin acts as a hedging activity of one’s portfolio which is quite differed notion from crypto critics.

Palihapitiya who appeared to be Warren Buffet made his statements at CNBC on bitcoin, “it’s the single best hedge against the traditional financial infrastructure.” “Whether you support the fiscal and monetary policy or not, it doesn’t matter. This is the schmuck insurance you have under your mattress”, he further appended.

Palihapitiya began accumulating the pioneer cryptocurrency way before major bull trend when it was trading around $100-$150 levels. 

By Niranjan Patil
  • Market Data

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