Bitcoin is showing signs of becoming a serious asset class.
Last week’s price swings hardly back up that assertion. The cryptocurrency dropped 7.8% on Thursday after news that the People’s Bank of China threatened to shut exchanges that violate money-laundering rules. The announcement also prompted some of the biggest websites operating bitcoin in the country to halt withdrawals, limiting them to converting the digital coin to yuan and depositing it in local banks.
For all the volatility, though, there are indications that bitcoin is acting more grown up. Go back to December 2013, when the PBOC intervened after the cryptocurrency reached a record high of $1,137. It then dropped 51.4% in a week, only to bounce back about 70% in the next two days and fall below $600 in another week. Bitcoin then settled into a slow descent to $183 by January 2015.
The latest swings followed a similar pattern. As soon as bitcoin breached $1,000, the Chinese authorities got involved and the price plunged. Last week, once again, that level was pierced, and once more the central bank entered the fray. On Monday, the price was little changed at $1,003.
The difference now is the magnitude of the moves. While the currency did fluctuate by double digits some days, these were nothing like the gyrations the PBOC prompted back in 2013.
Movements deriving from black swan events for the currency are therefore much smaller and shorter-lived than they once were. There are some technical reasons for that: There’s greater volume, circulation is broader, and the overall market is deeper.
The relative stability of bitcoin is probably also a result of the variety of instruments associated with it available to investors. People wanting to hedge their positions or even short the asset, for example, can use futures contracts traded through Bitmex.com, a marketplace that specializes in them. Investors can even use the platform to check whether the direction of the currency is changing.
The quarterly contract sold at Bitmex entered backwardation—the future price fell below the spot price—in January, shortly after the PBOC started cracking down on the exchanges. In a market with limited supply, the fact that most of the big traders are betting prices will go down must be bad news. So it proved, but this time hedging may have limited the downside.
Bitfinex, another site, has created an active marketplace for lending bitcoin to people who want to sell it short. The exchange even publishes an average daily rate for borrowing the currency, which has been going up in the past two weeks.
Bitcoin is still a small market, prone to dislocations, but as the variety of instruments around the currency grows, it’s starting to look more like the real thing.
