Bitcoin’s Underperformance Compared to Risk Assets: A Market Puzzle

Bitcoin's Underperformance Compared to Risk Assets: A Market Puzzle

Bitcoin’s Underperformance in a Bull Market: A Warning Sign for Crypto Investors

The recent underperformance of Bitcoin (BTC) compared to the stock market has caught the attention of industry experts, sparking concerns about the broader crypto market. According to Mike McGlone, a Senior Commodity Strategist at Bloomberg Intelligence, Bitcoin’s decline in comparison to the Nasdaq 100 stock index since its 2021 peak and April bounce could be signaling potential headwinds for cryptocurrency investments.

“If Bitcoin truly is the ‘fastest horse in the race,’ as some consider it to be, then it should logically be outperforming in an everything bull market. However, that is not the case,” notes McGlone.

One crucial factor behind Bitcoin’s underperformance is the aggressive liquidity pull from central banks, particularly the Federal Reserve (Fed). Despite the producer price index finished-goods gauge at minus 3.1% and dropping from 2022’s 18.3% peak at its fastest pace since 1948, the Fed still plans on tightening its monetary policy in the third quarter. McGlone suggests that Bitcoin’s lackluster performance could be an early sign of underlying market issues, given the aggressive liquidity pulls from central banks.

On a one-year basis to August 1st, Bitcoin has yielded just over a 20% return, similar to the Nasdaq. However, the cryptocurrency’s volatility remains about two times greater than that of the stock market. McGlone warns that Bitcoin’s failure to outperform as expected in an everything-bull market may indicate more significant market problems, raising caution for investors.

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Bitcoin and Ethereum Volatility at Historic Lows

In addition to concerns about Bitcoin’s underperformance, the cryptocurrency market is currently experiencing historically low levels of volatility. Luuk Strijers, Chief Commercial Officer at Deribit, a prominent cryptocurrency derivatives exchange, highlights that the Deribit Volatility Index (DVOL) for both Bitcoin and Ethereum is trading at all-time lows.

This noteworthy occurrence is further amplified by the fact that the DVOL for Ethereum is currently below that of Bitcoin, an uncommon phenomenon that could be attributed to the activities of a single large trader, often referred to as a whale.

Despite existing low levels of volatility, Strijers points out that the market anticipates a significant upswing in volatility soon. Several factors contribute to this expectation, including the upcoming ruling on the Blackrock spot Exchange-Traded Fund (ETF) and the approaching Bitcoin Halvening.

Deribit has observed signs of these expectations in the market, such as the steepness of the term structure and the enduring call skew. The increasing call skew indicates that market participants anticipate heightened volatility and potential price movements in the near future, despite the current low levels of volatility.

The ruling on the Blackrock spot ETF is anticipated to have a substantial impact on the cryptocurrency market. If approved, the ETF will enable investors to gain exposure to Bitcoin indirectly, potentially driving up demand and prices. Conversely, a rejection of the ruling may lead to temporary price drops and increased volatility. Additionally, the approaching Bitcoin Halvening, expected in 2024, also contributes to the anticipation of increased volatility. The Halvening event occurs roughly every four years, cutting the block reward for Bitcoin miners in half. This reduction in supply often drives up prices and increases market volatility.

Strijers advises investors and traders to remain vigilant and prepare for potential price movements and increased volatility in the cryptocurrency market, despite the current low levels of volatility.

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

At the time of writing, BTC is trading at $29,100, representing a slight increase of 0.8% in the past 24 hours.

As the industry closely watches Bitcoin’s underperformance in a bull market and the historically low levels of volatility in the crypto market, it becomes increasingly important for investors to understand the potential implications and navigate these conditions. A deep understanding of the underlying factors and market dynamics can help investors make informed decisions and manage risk effectively in the ever-evolving landscape of the blockchain industry.