Why Doesn’t Bitcoin Outperform Most Risky Assets? A market puzzle

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Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence, recently recommended Bitcoin (BTC) underperformance relative to the stock market could be a red flag for investors.

That BTC fails to shine in a bull market

McGlone notes that Bitcoin has declined against the Nasdaq 100 stock index since its 2021 peak and April rally. This declining performance could indicate mounting headwinds not only for Bitcoin but for the broader crypto market as well. McGlone explained:

If bitcoin really is the “fastest horse in the race,” as some call it, then logically it should do better in an all-bull market. However, this is not the case.

McGlone specifically points to the most aggressive central bank liquidity pull in history, which could be a major factor behind Bitcoin’s underperformance.

The Federal Reserve (Fed) is still anticipating the third quarter, though the finished goods index is down 3.1%, falling from a 2022 peak of 18.3% at the fastest pace since 1948, which may be part of that what the underperforming bitcoin is “sniffing”. out,” McGlone said.

On a yearly basis through Aug. 1, bitcoin is up just over 20%, similar to the Nasdaq, yet the cryptocurrency’s volatility is about twice as high.

McGlone believes Bitcoin’s underperformance could be a red flag for the broader market. The fact that bitcoin is not doing as well as it should in an all-bull market could indicate that larger market issues are at play, especially in light of aggressive central bank liquidity withdrawals.

Bitcoin and Ethereum volatility at historic lows

In a statement shared with NewsBTC, Luuk Strijers, the Chief Commercial Officer of Deribit, a well-known cryptocurrency derivatives exchange, recently stated that the Deribit Volatility Index (DVOL) for both Bitcoin and Ethereum is currently trading at all-time lows.

This is a significant development, especially as the DVOL for ETH is below the DVOL for BTC, which is rare and may have been caused by the activity of a single major trader, commonly known as a whale.

Despite the current low volatility, Luuk Strijers emphasizes that the market expects a significant increase in volatility in the near future. This expectation is driven by several factors, including the upcoming Blackrock Spot Exchange Traded Fund (ETF) decision and the upcoming Bitcoin halving.

Strijers notes that Deribit has observed signs of these expectations in the market, such as the significant steepness of the term structure, with the price sitting around 50 on June 24, and the ongoing call skewness.

These indicators suggest that despite the current low level of volatility, the market is anticipating increased volatility and possible price movements in the near future.

The Blackrock Spot ETF ruling is expected to have a significant impact on the cryptocurrency market. If approved, the ETF will allow investors to gain exposure to Bitcoin without directly holding the cryptocurrency, potentially increasing demand and driving prices higher.

If, on the other hand, the decision is not adopted, this could lead to a temporary drop in prices and increased volatility. The upcoming bitcoin halving, which is expected to occur in 2024, is another factor contributing to the expectation of increased volatility, according to Strijers.

The halving is a major event on the bitcoin network, occurring roughly every four years, when the block reward for bitcoin miners is cut in half. This tends to reduce the supply of Bitcoin in the market, potentially driving up prices and increasing volatility.

Despite the current low volatility, Strijers suggests that investors and traders should remain vigilant and prepare for possible price movements and increased volatility in the cryptocurrency market.

BTC’s downtrend on the 1-day chart. Source: BTCUSDT on TradingView.com

At the time of writing, BTC is trading at $29,100, up slightly by 0.8% over the past 24 hours.

Selected image from iStock, chart from TradingView.com

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