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Why is Bitcoin so heavily correlated with QQQ and interest rates? Weren’t proponents adamant it was a good hedge?

dom96 4y ago
I keep saying this and recently was told by someone that "during a crash all asset correlations tend to 1". Not sure how much there is behind that, but I'm skeptical: Bitcoin is finally proving more and more to be at worst a scam and at best a far too over-valued currency.
- nonameiguess 4y ago
  This probably seems trivial, but real hedges, i.e. shorts, puts, credit default swaps, and insurance policies against whatever is crashing, will go up in value during a crash.
repomies69 4y ago
It is good hedge only after the excess leverage is squeezed out of it. Saylor and his buddies have been promoting leverage a lot, and now we see the results.
UncleMeat 4y ago
“Store of value. Resistant to inflation.”
sem000 4y ago
I keep saying the same exact thing. I never bought into, but wasn’t this one of the main “selling points” of bitcoin?
- bombcar 4y ago
  This was the story quite awhile ago, when it was uncorrelated (basically, because it was unknown). Just like "instant payments" and "non-inflationary" those have sailed. "Store of value" is looking a little weak. "Transfer funds to Russia" is holding out ok.
- api 4y ago
  It failed as digital cash (outside of some very limited niches), so they moved the goal post to "store of value." It's failed at that, and at being "digital gold" or an inflation hedge. It has also failed as a medium for digital assets now that the NFT craze is showing itself to be hollow and is collapsing. It's failed as a medium for decentralized organizations (DAOs) since they've all either been hacked to death or revealed to not actually be decentralized. Where do they find a new well of hype now? I still believe that the concept of decentralized cryptocurrency is technically viable, but the entire current cryptocurrency ecosystem would probably have to be burned to the ground for anything honest and well built and not structurally a hyperdeflationary decentralized Ponzi/pyramid scheme to get traction.
- lottin 4y ago
  The keep coming up with new pitches as old ones get debunked.
dkjaudyeqooe 4y ago
Putting aside the questionable idea that it's a hedge, people weren't using that way, they were borrowing money at near zero interest rates and buying it up on margin. Now the music has stopped and people are scrambling for the exits.
teeray 4y ago
Could this be because of wall street’s increasing investment in crypto? It just seems like every time there’s an investment that offers shelter from a crashing market that becomes accessible to joe investor, it ceases to be a good place to hide.
- CaptainZapp 4y ago
  What increasing wall street investments in crypto? Please do elaborate.
  - micah94 4y ago
    Coinbase is publicly traded, Michael Sayler's company, GBTC, the futures market. If you watch CNBC there are a ton of crypto commercials.
  - jjeaff 4y ago
    Perhaps they are talking about Saylor's publicly traded fund and Tesla buying large amounts of crypto.
deleted 4y ago
[deleted]
fny 4y ago
1. The crowd that bids up bitcoin and tech stocks do so with leverage. 2. Leverage becomes more expensive with higher rates. 3. The same crowd owns both assets (e.g. Bitcoin and Tesla) 4. Qs are low yield assets with high projected future cashflows. Low rates bring those cash flows to the present, high rates discount them more aggressively. Bitcoin has 0 cash flow, so the effect is worse. Bitcoin proponents have no financial education. Bitcoin is not a hedge for anything (including inflation). Crypto is a high beta asset with an inelastic supply which makes it even more volatile in periods when everyone wants/needs to liquidate simultaneously.
- fallingfrog 4y ago
  I can’t even imagine the state of mind that would lead someone to borrow real money in order to buy crypto. I mean that’s Joker on crystal meth level crazy.
  - fny 4y ago
    I can. From the lows, it makes a lot of sense. It does not make sense near all time highs.
cjbgkagh 4y ago
Speculative debt fueled bubble enabled by low interest rates. One of many. Higher interest rates drive up the opportunity cost of speculation which pops the bubble. Bitcoin is pure speculation and very liquid so it’ll pop sooner and faster than other investments such as stocks and housing. As far as I can tell, even gold tends to go down in the early stages of recessions as people use its liquidity to cover losses elsewhere.
kareemsabri 4y ago
The theory was it was "uncorrelated" with traditional assets because the inputs to their price movement (economic performance, monetary and fiscal policy) were in theory isolated from the purely digital asset of BTC. With hindsight it's pretty easy to see that's false, since the common tie is the same investors investing in both asset classes, with dollars they get from economic performance and monetary and fiscal policy.
davidgerard 4y ago
OP here - Yes, and they were talking nonsense. You should assume that literally every claim a hodler makes is just marketing. Bitcoin was uncorrelated right up until you need it to be. When NASDAQ sneezes, bitcoin catches COVID. The sort of tech stock buyer who also gets a bit of crypto will tend to be easily squeezed (because they are the sort of person who buys crypto). So when there's a stock market dip, do they sell their stocks? No, they sell the frivolous crap first. So NASDAQ goes down 3%, bitcoin goes down 10%. Mostly though, bitcoin is unregulated, illiquid and tiny. So the main force on the market is internal shenanigans - not outside forces at all. There's a paper to this effect (which I can't find right now), showing that BTC and ETH hardly respond to outside events.
unicornmama 4y ago
Because of DEBT. Organisations borrowed fiat cash to keep the crypto show going. This all started to unravel when borrowing costs went up. Many crypto businesses used their coins as collateral for loans, as the market collapses their counterparties force liquidation which forces the price downward which forces even more liquidation. And now we are learning how much leverage went into crypto. It's like the GFC except that (1) it seems [mostly] contained in the crypto world and (2) there will be no government backstop. https://twitter.com/hodlKRYPTONITE/status/1537602932052758528?s=20&t=-v5y8JQ31sni6_AVV09mkg https://twitter.com/hodlKRYPTONITE/status/153760293205275852... Wrt to QQQ this is a combination of inreased borrowing costs makes the ongoing game of share buy-backs more expensive; the increased in treasury yield increases the discount rate which reduces the net present value of future cashflows which reduces valuation; increased inflation greatly reduces value of money in the future; and we are very likely going to enter a recession which will reduce earnings and growth.
- sgt101 4y ago
  The good thing is that the banks have mostly held the line against the traders who wanted to get into it. Some places have some exposure, but almost everyone was pretty skeptical. GFC memory is still in place, thank god.
  - TedDoesntTalk 4y ago
    What is GFC?
    - akgoel 4y ago
      2008 great financial crisis
nate_martin 4y ago
Crypto soaks up excess liquidity like a sponge.
adam_arthur 4y ago
Because most buying Bitcoin are speculators trying to make money. Same as the people buying tech stocks at 100x sales multiples. When there's no fundamental to support a price, it just moves on the whim of risk on/risk off
- deleted 4y ago
  [deleted]
hangonhn 4y ago
I believe the thinking behind Bitcoins being a good hedge is that there are some similarities between it and gold. I'm not saying that's true but I believe that's where the idea started from. They're both rare (arguably hard capped at some point) assets that have no (or little) inherent value and their price are based on the value people assign to them. There are gold critics like Warren Buffet who've argued that gold investing is pointless because, to paraphrase him, "You pay people to dig it out of the ground and refine it and then you pay more people to guard it and let it sit there." Despite critics like Buffet, gold has held its value and often goes up during a downturn. So I can see how Bitcoin proponents might draw the parallels between the two, including the same sort of critics, and thus reasoned if gold works as a hedge then Bitcoin might as well. There are also some overlap between gold people and Bitcoin proponents, especially in the early days of Bitcoins. My friends who were interested in Bitcoins in the early days were the same types who would buy gold as a store of value. Maybe it's from this early origin that the idea was passed down.
- sgt101 4y ago
  Gold has some uses beyond finance: - electronics - decoration/ornamentation - if you give it to some people, they will have sex with you This is 3 more uses than bitcoin.
  - DeathArrow 4y ago
    2 more uses as some people would have had sex with you if you gave them bitcoins.
    - RivieraKid 4y ago
      3, because gold has this use too.
- nonameiguess 4y ago
  I think the key thing missing is that gold has a few thousand years of cultural inertia behind is since humans have used it as a store of value, show of ostentatious wealth, and cross-jurisdiction medium of exchange for about as long as we have records. It may not still be well-suited to that purpose, making Buffett right on the fundamentals, but it could take centuries for current practices to reconcile with that reality. Bitcoin, on the other hand, has none of that historical advantage working in its favor. It's more like discovering some new kind of volcanic rock that only exists in one place, can't be artificially manufactured, has no industrial applications, and isn't pretty when made into jewelry, but is guaranteed to stay rare, and trying to convince people they should treat it like gold.
DeathArrow 4y ago
>Why is Bitcoin so heavily correlated with QQQ and interest rates? Large miners didn't sell the coins and borrowed real money to fund their new mining operations. Since the rates are going up, they have no choice but to sell. And that is not to mention the poor folks who borrowed money to buy bitcoins.
- moneywoes 4y ago
  Thank you, this is a really good point I haven't seen mentioned elsewhere

I keep saying this and recently was told by someone that "during a crash all asset correlations tend to 1". Not sure how much there is behind that, but I'm skeptical: Bitcoin is finally proving more and more to be at worst a scam and at best a far too over-valued currency.

nonameiguess 4y ago
This probably seems trivial, but real hedges, i.e. shorts, puts, credit default swaps, and insurance policies against whatever is crashing, will go up in value during a crash.

repomies69 4y ago

It is good hedge only after the excess leverage is squeezed out of it. Saylor and his buddies have been promoting leverage a lot, and now we see the results.

UncleMeat 4y ago

“Store of value. Resistant to inflation.”

sem000 4y ago

I keep saying the same exact thing. I never bought into, but wasn’t this one of the main “selling points” of bitcoin?

bombcar 4y ago
This was the story quite awhile ago, when it was uncorrelated (basically, because it was unknown). Just like "instant payments" and "non-inflationary" those have sailed. "Store of value" is looking a little weak. "Transfer funds to Russia" is holding out ok.
api 4y ago
It failed as digital cash (outside of some very limited niches), so they moved the goal post to "store of value." It's failed at that, and at being "digital gold" or an inflation hedge. It has also failed as a medium for digital assets now that the NFT craze is showing itself to be hollow and is collapsing. It's failed as a medium for decentralized organizations (DAOs) since they've all either been hacked to death or revealed to not actually be decentralized. Where do they find a new well of hype now? I still believe that the concept of decentralized cryptocurrency is technically viable, but the entire current cryptocurrency ecosystem would probably have to be burned to the ground for anything honest and well built and not structurally a hyperdeflationary decentralized Ponzi/pyramid scheme to get traction.
lottin 4y ago
The keep coming up with new pitches as old ones get debunked.

dkjaudyeqooe 4y ago

Putting aside the questionable idea that it's a hedge, people weren't using that way, they were borrowing money at near zero interest rates and buying it up on margin. Now the music has stopped and people are scrambling for the exits.

teeray 4y ago

Could this be because of wall street’s increasing investment in crypto? It just seems like every time there’s an investment that offers shelter from a crashing market that becomes accessible to joe investor, it ceases to be a good place to hide.

CaptainZapp 4y ago
What increasing wall street investments in crypto? Please do elaborate.
- micah94 4y ago
  Coinbase is publicly traded, Michael Sayler's company, GBTC, the futures market. If you watch CNBC there are a ton of crypto commercials.
- jjeaff 4y ago
  Perhaps they are talking about Saylor's publicly traded fund and Tesla buying large amounts of crypto.

deleted 4y ago

[deleted]

fny 4y ago

1. The crowd that bids up bitcoin and tech stocks do so with leverage. 2. Leverage becomes more expensive with higher rates. 3. The same crowd owns both assets (e.g. Bitcoin and Tesla) 4. Qs are low yield assets with high projected future cashflows. Low rates bring those cash flows to the present, high rates discount them more aggressively. Bitcoin has 0 cash flow, so the effect is worse. Bitcoin proponents have no financial education. Bitcoin is not a hedge for anything (including inflation). Crypto is a high beta asset with an inelastic supply which makes it even more volatile in periods when everyone wants/needs to liquidate simultaneously.

fallingfrog 4y ago
I can’t even imagine the state of mind that would lead someone to borrow real money in order to buy crypto. I mean that’s Joker on crystal meth level crazy.
- fny 4y ago
  I can. From the lows, it makes a lot of sense. It does not make sense near all time highs.

cjbgkagh 4y ago

Speculative debt fueled bubble enabled by low interest rates. One of many. Higher interest rates drive up the opportunity cost of speculation which pops the bubble. Bitcoin is pure speculation and very liquid so it’ll pop sooner and faster than other investments such as stocks and housing. As far as I can tell, even gold tends to go down in the early stages of recessions as people use its liquidity to cover losses elsewhere.

kareemsabri 4y ago

The theory was it was "uncorrelated" with traditional assets because the inputs to their price movement (economic performance, monetary and fiscal policy) were in theory isolated from the purely digital asset of BTC. With hindsight it's pretty easy to see that's false, since the common tie is the same investors investing in both asset classes, with dollars they get from economic performance and monetary and fiscal policy.

davidgerard 4y ago

OP here - Yes, and they were talking nonsense. You should assume that literally every claim a hodler makes is just marketing. Bitcoin was uncorrelated right up until you need it to be. When NASDAQ sneezes, bitcoin catches COVID. The sort of tech stock buyer who also gets a bit of crypto will tend to be easily squeezed (because they are the sort of person who buys crypto). So when there's a stock market dip, do they sell their stocks? No, they sell the frivolous crap first. So NASDAQ goes down 3%, bitcoin goes down 10%. Mostly though, bitcoin is unregulated, illiquid and tiny. So the main force on the market is internal shenanigans - not outside forces at all. There's a paper to this effect (which I can't find right now), showing that BTC and ETH hardly respond to outside events.

unicornmama 4y ago

Because of DEBT. Organisations borrowed fiat cash to keep the crypto show going. This all started to unravel when borrowing costs went up. Many crypto businesses used their coins as collateral for loans, as the market collapses their counterparties force liquidation which forces the price downward which forces even more liquidation. And now we are learning how much leverage went into crypto. It's like the GFC except that (1) it seems [mostly] contained in the crypto world and (2) there will be no government backstop. https://twitter.com/hodlKRYPTONITE/status/1537602932052758528?s=20&t=-v5y8JQ31sni6_AVV09mkg https://twitter.com/hodlKRYPTONITE/status/153760293205275852... Wrt to QQQ this is a combination of inreased borrowing costs makes the ongoing game of share buy-backs more expensive; the increased in treasury yield increases the discount rate which reduces the net present value of future cashflows which reduces valuation; increased inflation greatly reduces value of money in the future; and we are very likely going to enter a recession which will reduce earnings and growth.

sgt101 4y ago
The good thing is that the banks have mostly held the line against the traders who wanted to get into it. Some places have some exposure, but almost everyone was pretty skeptical. GFC memory is still in place, thank god.
- TedDoesntTalk 4y ago
  What is GFC?
  - akgoel 4y ago
    2008 great financial crisis

nate_martin 4y ago

Crypto soaks up excess liquidity like a sponge.

adam_arthur 4y ago

Because most buying Bitcoin are speculators trying to make money. Same as the people buying tech stocks at 100x sales multiples. When there's no fundamental to support a price, it just moves on the whim of risk on/risk off

deleted 4y ago
[deleted]

hangonhn 4y ago

I believe the thinking behind Bitcoins being a good hedge is that there are some similarities between it and gold. I'm not saying that's true but I believe that's where the idea started from. They're both rare (arguably hard capped at some point) assets that have no (or little) inherent value and their price are based on the value people assign to them. There are gold critics like Warren Buffet who've argued that gold investing is pointless because, to paraphrase him, "You pay people to dig it out of the ground and refine it and then you pay more people to guard it and let it sit there." Despite critics like Buffet, gold has held its value and often goes up during a downturn. So I can see how Bitcoin proponents might draw the parallels between the two, including the same sort of critics, and thus reasoned if gold works as a hedge then Bitcoin might as well. There are also some overlap between gold people and Bitcoin proponents, especially in the early days of Bitcoins. My friends who were interested in Bitcoins in the early days were the same types who would buy gold as a store of value. Maybe it's from this early origin that the idea was passed down.

sgt101 4y ago
Gold has some uses beyond finance: - electronics - decoration/ornamentation - if you give it to some people, they will have sex with you This is 3 more uses than bitcoin.
- DeathArrow 4y ago
  2 more uses as some people would have had sex with you if you gave them bitcoins.
  - RivieraKid 4y ago
    3, because gold has this use too.
nonameiguess 4y ago
I think the key thing missing is that gold has a few thousand years of cultural inertia behind is since humans have used it as a store of value, show of ostentatious wealth, and cross-jurisdiction medium of exchange for about as long as we have records. It may not still be well-suited to that purpose, making Buffett right on the fundamentals, but it could take centuries for current practices to reconcile with that reality. Bitcoin, on the other hand, has none of that historical advantage working in its favor. It's more like discovering some new kind of volcanic rock that only exists in one place, can't be artificially manufactured, has no industrial applications, and isn't pretty when made into jewelry, but is guaranteed to stay rare, and trying to convince people they should treat it like gold.

DeathArrow 4y ago

>Why is Bitcoin so heavily correlated with QQQ and interest rates? Large miners didn't sell the coins and borrowed real money to fund their new mining operations. Since the rates are going up, they have no choice but to sell. And that is not to mention the poor folks who borrowed money to buy bitcoins.

moneywoes 4y ago
Thank you, this is a really good point I haven't seen mentioned elsewhere