Bitcoin is not a hedge for anything because its volatility actually adds risk to every single scenario a portfolio manager can create. | Source: Shutterstock
By CCN Markets: As the bitcoin skeptic here at CCN, my job is to provide counter-arguments to the bitcoin bulls.
Today I’m going to debunk the claim that bitcoin is a hedge against anything, much less the stock market.
What Is a Hedge? It Sure Ain’t Bitcoin!
A “hedge” is an investment made to offset some form of risk. It can take many forms.
An investor may purchase put options on the stock market that will increase in value if the stock market falls. Perhaps a company will open a factory overseas that it exports products to in order to hedge against currency risk.
So the key to a hedge is that it, as an investment, offsets risk in another investment.
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Risk is measured by volatility. The higher the volatility of a security, the riskier it is.
How to Measure Risk
Volatility is measured by standard deviation.
To provide a baseline, the five-year standard deviation for the S&P 500 is 12. That means the S&P has a 95% likelihood of moving in a range of -24% to +24% in any given year.
Now let’s look at one of most volatile securities there is in the securities markets: crude oil. The five-year standard deviation for the United States Oil Fund ETF is 28.
Bitcoin is more volatile and riskier than this, but it gets worse.
Now let’s look at a 3x leveraged oil fund ETF, one designed to provide triple the returns of crude oil. The five-year standard deviation for the ProShares Ultra Bloomberg Crude Oil ETF is 54.
The five-year standard deviation for the Grayscale Bitcoin Trust ETF is 85. That means the average annual return of this ETF could swing 170 percent in either direction in any given year. That means, yes, it could go to zero.
That’s right. Bitcoin is 60 percent more volatile than even a 3x leveraged version of the most volatile security out there.
This “Hedge” Doesn’t Reduce Anything
So how on earth could it be a hedge against anything?
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management, tells CCN:
“Bitcoin is literally the riskiest tradeable asset right now, and I wouldn’t even call it an asset. It is literally backed by nothing and based entirely on speculation. That’s why it is so volatile. It’s a sucker’s bet, not a hedge”
Butowsky also points out that no other chart of any security anywhere correlates, either positively or negatively, to any other asset. Any expert who says otherwise is “dead wrong” – like this guy:
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For those who say that makes it a perfect non-correlated asset to the stock market, the idea of a hedge is – once again – to offset risk.
Bitcoin only increases the overall risk in a portfolio.
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