Does This Look Like a Hedge to You (Bitcoin Edition)?


Chief Strategist at Interactive Brokers

Global equity markets have been buffeted by geopolitical and inflationary concerns.  Markets can often shrug off the most horrible global events if they have little impact upon world economies (for example, developed markets took no notice of the situation in Rwanda).  But when those tensions involve a significant energy producer like Russia, they boost oil prices, and higher fuel prices are among the most visible and painful forms of inflation.  It is therefore not surprising that global equity markets have generally been suffering as investors wrestle with the ramifications of inflation and its effects upon growth, earnings, and potential central bank responses.

During rocky times it is normal for investors to seek hedges for their portfolios.  Hedging is not always a popular activity during robust markets, because the activity can be a drag on performance.  By definition, a hedge is an item that either moves in the opposite direction of the investment in question or dampens the volatility of the portfolio.  Cash is the classic hedge because it has extraordinarily low volatility.  I recently spoke to a well-respected investor[i] who pared his portfolio exposure from investing 4% in each of 25 stocks to 3% exposures in all.  Oil futures and energy shares have generally been an excellent hedge because they have risen while a wide range of other financial instruments have fallen. 

One popular set of financial instruments that has been touted as a potentially decorrelating portfolio hedge is cryptocurrencies.  This theory is not without logic, since cryptos are indeed idiosyncratic.  Unfortunately, they have not really been a widely held investment for a long period of time, so their performance as a hedge has rarely been tested. This is the first one since the Covid crisis – the aftermath of which spurred crypto adoption immensely – and if we use bitcoin as a proxy for cryptos, the results haven’t been pretty:


Source: Bloomberg

We have been asserting for some time that bitcoin is acting like just another risk asset, and its recent performance has done little to dissuade us.  There may be advantages to owning cryptos, and blockchain technology promises many, but hedging is not one of them. 

The winner, by the way: stodgy old gold.  It hasn’t done much over the past few years, and hasn’t exactly rocketed higher even during the current crises, but when volatility abounds, stodgy can be good.

[i] Shameless plug – for an upcoming Traders Insight Radio Podcast

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