Wednesday's Market Minute: The Utility Of Bitcoin

A lot of explanations have been given for Bitcoin's big move this year: Wall Street institutional interest, progress in market structure, gold-like accumulation as a hedge against central bank extravagance, Chinese wealth transfer, excitement around Facebook.com, Inc.'s FB Libra. One, some, or all of those may be true, but the opaque nature of bitcoin’s trading cues makes evidence for these hypotheses limited. One way to remove some of this guesswork is to consider bitcoin and crypto more wholly as an asset class, one that sits at the farthest end of the risk-taking spectrum with Treasury bonds on one end, corporate bonds somewhere in the other direction, the stock of those corporations further still, and the stocks of the companies with the greatest potential, yet greatest risk, even further.

This is the nature of risk and volatility. The mega-bull bitcoin views are a bet on a huge shift in the way markets and economies function: a bet with a very low probability of success but a huge reward if correct. Taken this way, bitcoin’s utility right now may not be as a means of exchange or store of value but rather a risk-taking thermometer through which to take the temperature of sentiment in financial markets. It began its ascent as the VIX dropped in the spring, and took off as stocks hit new highs and money flows returned to risk assets. What does that mean if it crashes again? Last year, it may have been a warning.

Image sourced from Pixabay