Growing concern over the COVID-19 coronavirus is gripping financial markets around the world. However, the cryptocurrency community is currently wondering why this is impacting the crypto markets. Now, one macro analyst suggests it could be due to Bitcoin simply performing “too well” in comparison with stocks.
Raoul Pal says hedge fund risk management is behind crypto price crash
Specifically, this macro analyst is Raoul Pal, CEO of the finance media startup Real Vision. What’s more, Pal has a wealth of experience working at prominent hedge funds. In fact, Pal is now arguing that hedge funds are to blame for Bitcoin’s recent price fall.
At the time of writing, Bitcoin is trading around $7,800 – significantly down from recently trading near $9,000. Just a few weeks ago, Bitcoin broke through the $10,000 barrier and was exhibiting a multitude of bullish signs.
However, the stock market has taken a comparable, or even greater, beating than Bitcoin and the crypto market. Pal suggests that the stock market fall is causing the crypto market to drop, as hedge fund managers are having to liquidate their holdings.
“It feels like any hedge fund that was long bitcoin is having to liquidate. VAR takes no prisoners. (For those new to VAR it is the measure of risk in a portfolio and is connected to volatility, so as vol goes up of all assets, they have to reduce risk).”
Increasing stock market volatility is, ironically, making Bitcoin too risky
Specifically, VAR – or Value at Risk – is a risk management term. Even though Bitcoin’s fundamentals are not changing due to the COVID-19 coronavirus, Pal suggests hedge fund managers have to offload Bitcoin.
In essence, this is due to the increasing volatility of regular stocks due to the stock market meltdown. Although Bitcoin as an asset could actually be performing better than the market, hedge fund managers could be forced to sell due to Bitcoin’s risk rating.
Selling Bitcoin or cryptocurrency holdings would effectively reduce hedge fund managers’ risk exposure according to the VAR measurement. As such, Pal is essentially stating that the traditional stock markets meltdown is, ironically, forcing hedge fund managers to sell crypto.
Pal says the crypto price dip is a “buying opportunity”
If true, this would explain why Bitcoin and the wider cryptocurrency market is crashing along the stock market. Pal also states that current crypto prices present a “buying opportunity – but people don’t need to “rush in”.
“It’s a buying opportunity but no need to rush in yet. The current event in markets will accelerate the need for the new financial system over time. We know where this is leading to – the digital revolution.”
This somewhat ties into a recent suggestion by a Libra Association member that crypto is falling due to margin calls. Specifically, this recent report said that traditional stock market margin calls are making investors exit their crypto positions.
It is also possible that general market panic is making investors exit their crypto positions. However, Bitcoin in particular is often seen as a relatively safe, counter-cyclical store-of-value – much like gold.
Rasmus Pihl is a writer for Toshi Times by day and an avid follower of the blockchain industry by night. Rasmus holds a Bachelor’s Degree in Marketing from the Gothenburg School of Business, Economics, and Law and runs a Swedish marketing consulting firm. Moreover, when he isn’t writing for Toshi Times, traveling, working or changing the world in some other capacity, Rasmus is more than likely caught up in postgraduate studies.