U.S. Treasury bonds, also a safe haven under normal conditions, dropped on Wednesday, pushing yields higher despite the massive sell-off on Wall Street. The 10-year Treasury yield rose more than 10 basis points to 0.89 percent even though the Dow Jones Industrial Average fell by 5.9 percent.
Bitcoin is in turmoil on Thursday as another severe sell-off is seen in the traditional markets.
The top cryptocurrency by market value plunged to as low as $5,678 — the lowest level since May 2019 — soon before press time. That represents a 25 percent drop on a 24-hour basis, according to CoinDesk’s Bitcoin Price Index. However, just as quickly, prices rebounded to over $6,550.
Meanwhile, major European equity market indices like Germany’s DAX, France’s CAC and U.K.’s FTSE 100 are down at least 6 percent at press time. Meanwhile, futures on the SP 500 are shedding over 4.5 percent. Asian equities also took a beating with Japan’s Nikkei index losing 4.5 percent.
The risk aversion, which began two weeks ago, worsened during the Asian trading hours after President Trump announced a 30-day ban on travel from most of Europe and failed to meet investor expectations for additional fiscal stimulus measures to counter the coronavirus epidemic.
While stocks and bitcoin are down, gold, a classic haven asset, is struggling to eke out gains. The yellow metal is currently trading largely unchanged on the day at $1,642 per ounce, having printed a low of $1,630 earlier.
The traditional safe havens are struggling right now, possibly because the institutions are liquidating positions in these assets to fund margin calls in the equity markets.
A margin call occurs when the value of the investor’s leverage account drops below the minimum margin requirement. The investor is then required to bring in additional capital or securities to build back the account up to the minimum margin requirement.
«We started seeing institutional liquidity issues today. For the first time since the beginning of the bear market neither US treasury bonds nor gold managed to hedge an SP decline,» angel investor and Messari’s head of product Qiao Want tweeted early Thursday.
Meanwhile, Bloomberg Markets’ Jonathan Ferro referred to Wednesday as the worst day of the last few weeks, as stocks tanked while treasury yields rose, highlighting liquidity stress in the market.
In fact, the hunger for liquidity was so strong on Wednesday that a model portfolio of 50 percent treasuries and 50 percent stocks fell by the most on record, according to Bloomberg’s cross-asset reporter Luke Kawa.
“People are raising cash to meet redemptions and margin calls. Market liquidity is freezing up, people are struggling to trade. The buy the dip mentality has totally flipped”, Ferro tweeted during Asian trading hours.
Source of liquidity?
Some investors think bitcoin is also being treated as a source of liquidity.
“How did BTC go from being a hedge against bad stuff to getting washed out and trading like a risk asset? When things go from bad, to very very bad like they did last week, investors take leverage down as fast as they can. They book profits to make up for other losses”, billionaire investor and CEO of Galaxy Digital Michael Novogratz tweeted earlier this week as an explanation for bitcoin’s 13 percent slide in late February. The SP 500 had suffered a double-digit drop during the same week.
Bitcoin’s futures market data validates Novogratz’s claim to some extent. The global open interest or the total number of outstanding futures contracts have dropped sharply over the last few weeks, signaling a slowdown in institutional activity.
Open interest topped out at highs above $5 billion on Feb. 14 and fell to nearly $3.8 billion to hit the lowest in nearly two months, according to Skew data.
Meanwhile, both the open interest and trading volumes in futures listed on the Chicago Mercantile Exchange, one of the most liquid futures markets, have also dropped sharply over the last couple of weeks.
Open interest fell to $171 million on Wednesday, the lowest level since Jan 6, having hit a high of $338 million on Feb. 14. Trading volume also hit a three-month low of $88 million on March 6, before witnessing a brief spike on March 9.
“It looks like institutional investors are taking a break from bitcoin in this unstable period with growing fear related to the coronavirus,» according to an Arcane Research tweet.
With coronavirus showing no signs of a slowdown, stocks may continue to lose altitude, possibly keeping bitcoin under pressure.
Rumors are doing the rounds that the U.S. Federal Reserve may deliver another emergency rate cut before the next week’s scheduled meeting to address the liquidity issue in the market.
However, rate cuts may fail to yield a sustainable bounce, as there is general consensus in the market that additional easing would not catalyze economic activity. The threat to global supply and demand is not caused by institutional systemic failures, but rather a global health pandemic.