For Cryptos, Geopolitics And Liquidity Don’t Mix

For Cryptos, Geopolitics And Liquidity Don’t Mix

Cryptos and liquidity do not go hand in hand, especially not where geopolitics is concerned.

Conventional wisdom may hold that cryptos are the place to be, when trade tensions rise and when governments tremor.

Consider the fact that stocks have sold off amid macro headlines where the U.S. threatened tariffs against China and delayed them, where Hong Kong faces mounting protests, where Argentina has seen a shock defeat of an incumbent president, and where in the U.S. the yield curve has inverted. Consider the fact, too, that bitcoin as a proxy for cryptos has been volatile, but on the main, relatively buoyant. It changed hands at a recent $10,540, down mid-teen percentages from recent peaks but leagues above the nadirs seen in recent months, at below $4,000.

Bloomberg noted yesterday (Aug. 13) that bitcoin has proven to be a haven, at least for some, against currency devaluations. But might the trade be getting crowded enough that premiums get levied? In one example, bitcoin traded earlier this week on, described as a peer-to-peer platform, for a 10 percent markup compared to other exchanges. In Hong Kong, the premium was 4 percent.

Differences of degree, and not of kind – for a premium is still a premium. And though anecdotal, the premiums suggest a flaw in the system.

The very idea of an exchange is to smooth the relationship between buyer and seller, to provide transparent bid/asks and to help provide liquidity to markets. The fact that there are such price differentials in far-flung markets means there is no real agreement as to what bitcoin (again, as a proxy for other cryptos) is worth.

Volatility in pesos, it seems, now means volatility in digital coinage. But when price differentials climb into the hundreds of dollars, this speaks to a new level of speculation for what is speculative to begin with. In a way, it’s “paying up for the right to pay up,” underscoring the fact that bitcoin is not worth anything more than the recent quote, wherever it is that one happens to look for it.

Bitcoin use cases have yet to materialize in a way that might bring stability to pricing, and in turn further the embrace of more use cases. There has even been a recent blow to using the crypto in the use case that proponents tout: as a hedge against other trading activities. The SEC just postponed a decision on two funds that ostensibly would have bowed in the U.S.: the Bitcoin ETF Trust and the VanEck SolidX Bitcoin Trust. The delay comes, as Barron’s reported earlier this week, as SEC Chairman Jay Clayton has had reservations about bitcoin manipulation on exchanges. We wonder if the recent premiums seen on exchanges, globally, may lengthen a pause.