The bitcoin-British pound (BTC/GBP) pair listed on major cryptocurrency exchanges, including Bitstamp and Bitfinex, is more active than ever. Analysts, however, are divided on whether the surge stems from investors switching to the largest cryptocurrency to protect against the sterling slide or from traders looking to profit from the volatility.
On Monday, which was the day when the pound crashed to a record low $1.035, trading volume in the pair listed on those two exchanges climbed to a record $881 million. That's 12 times the $70 million average daily volume of the past two years, according to data tweeted by James Butterfill, head of research at CoinShares, an early-stage crypto investor, early this week.
The pound's weakness was prompted by concerns over the U.K.'s fiscal health stemming from the new government's tax-cut plans. This month, the currency has weakened 7% against the dollar, the steepest drop since December 2016.
"An explosion in bitcoin trading against the pound underlines the potential of the biggest cryptocurrency to benefit from an apparent fragility in fiat currencies," analysts at Bitfinex said in an email.
Tom Dunleavy, an analyst at crypto data provider Messari, voiced a similar opinion in a research piece published Wednesday, saying European investors are snapping up bitcoin in the wake of the rapidly depreciating British pound and the euro.
Some observers, however, say trading volume – the total number of units or contracts exchanged between buyers and sellers – is an unreliable indicator of investor positioning. For every buyer, there is a seller, and so it's equally possible to argue that investors sold bitcoin as the pound took a hit.
"If you're selling BTC for EUR or GBP, the volume will spike," said David Belle, founder of market news service and trading community platform Macrodesiac.com and U.K. growth director at TradingView. "Same as if you're buying it."
Bitcoin enthusiasts have long hailed the cryptocurrency as a better alternative to fiat currencies and gold. That's because the cryptocurrency's reward halving – a programmed reduction in the pace of supply expansion every four years – goes counter to the ever-increasing supply of fiat.
Cryptocurrencies have been embraced in Turkey and other nations where confidence in the national currency has been shaken because of high inflation, government policies and relentless depreciation.
Looking for volatility
Still, the increase in trading volume may be due to exchange-rate volatility and traders selling pounds and euros to build a crypto stash, according to trader and analyst Alex Kruger.
Those who bought bitcoin may not be planning to hold it for the long term. When facing a fiat currency slide, investors often snap up cryptocurrencies to move money overseas and buy dollarized assets while bypassing the traditional banking channel.
The measure of expected price turbulence, or implied volatility, in major currencies, including the pound, recently climbed above similar measures for developing-nation currencies, Bloomberg reported.
More volatility often leads to higher volumes in any market as seasoned traders buy and sell large quantities to capture profits. So the increase in the BTC/GBP volume may have stemmed from speculators rather than from investors looking to snap up BTC as an inflation hedge.
It's also possible traders have been scurrying to take advantage of the arbitrage opportunity offered by the pound's volatility. Arbitrage refers to simultaneously buying and selling the same asset in different markets to profit from tiny differences in the asset's listed price.
"We noticed BTC vs GBP is dislocating from BTC vs. other fiat currencies, which means it is most likely a simple arbitrage trade," Clara Medalie, research director at crypto data provider Kaiko, said. "The uptick in BTC/GBP volume does not necessarily mean traders are diversifying into bitcoin."
While volumes in BTC/GBP have increased, the overall activity still remains low compared with the broader market.
"The pure BTC/GBP cross (at least on Binance, which should be the leading benchmark with their volumes) trades only $95 million. That's tiny compared to the $9.5bn that Binance executes in BTC/USDT cross," Markus Thielen, chief investment officer at British Virgin Islands-based IDEG Asset Management, said. Binance is the world's largest crypto exchange.
"If volumes are really driven by U.K.-based people, then the BTC/GBP cross on Binance should trade a lot more. We have seen this BTC/RUB had elevated levels of volumes initially during the Ukraine conflict," he said.