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Bitcoin has long been celebrated as a new form of money, a two-finger salute to the establishment, even as the digital equivalent of gold, but it’s not often prized for its stability. This could change with the introduction of a new futures contract.
Cryptocurrency exchange BTSE has made the unorthodox decision to quote gold futures contracts in bitcoin, rather than the more conventional US dollar.
Here’s how it works: It’s a perpetual contract – a future with no expiration – that tracks the value of a tether gold (XAUT) token, which in turn tracks the value of one troy ounce of physical gold. It is also built on the ERC20 token standard, which means it can be practically traded on any crypto exchange.
Unlike other contracts, this one is priced in bitcoin. While the USD spot price of XAUT tokens is currently $ 1,720, according to CoinGecko, BTSE’s contracts are trading around the 0.17 BTC mark.
The contract allows traders to compare and speculate on whether bitcoin or gold will turn out to have the greatest demand and outperform the other, as a new store of value.
“Imagine it as gold versus bitcoin,” a spokesperson for BTSE said.
See also: BTSE Exchange taps into crypto demand by increasing the quote request limits
However, a gold / BTC contract is bound to raise some eyebrows.
Like regular futures, perpetual contracts have forced liquidations. If the spot price exceeds a certain threshold, the contract automatically adjusts, at a loss for the holder. Cryptocurrency watchers are all too familiar with these and it is not unknown that millions of dollars worth of dollar-priced bitcoin contracts are liquidated in one fell swoop.
Surely a bitcoin-listed contract would risk being liquidated all the time?
BTSE believes that this is not likely because bitcoin and gold have a positive correlation against the dollar.
“If the two assets are positively correlated, the price volatility of this new instrument is, by right, even lower than that of gold / USD,” a spokesperson said. This is because the price of gold and bitcoin will likely drop by an equivalent ratio, so the contract remains more or less stable.
Bitcoin has long been dubbed “digital gold” without having any kind of relationship with it. That started to change earlier this year when it developed a correlation with the yellow metal against the dollar.
In an April report, Coin Metrics said that the correlation between bitcoin and gold “suddenly increased” on March 12 – “Black Thursday”. The market, they argued, could treat both as safe havens during increases in quantitative easing and monetary inflation.
Revisiting the report last week, Coin Metrics said, “The correlation between gold [and bitcoin] it has consistently maintained relatively high levels for several months, a phenomenon that has not historically been observed. “
See also: The number of institutions buying cryptocurrency futures has doubled in 2020: loyalty report
Not everyone agrees. Charles Bovaird, Vice President of Quantum Economics, says the ratio of gold to bitcoin over the past 90 days remains very weak, below 0.35. “In other words, the correlation was not high enough to be significant, at least during this particular time frame,” he said.
But BTSE argues that in a darker macro environment, where central banks are increasingly being relied upon to save the day, the market will begin to treat bitcoin more as a store of value.
By doing so, it will also improve its correlation with gold, making the prospect of forced liquidations for its bitcoin-priced gold contract less likely. In sharp comparison, dollar-priced contracts, which are unrelated to gold and whose value could change depending on the effects of the increased central bank stimulus, may feel a little more pressure.
If that happened, bitcoin would become more stable than the greenback.
