In a recent interview with Bitcoin advocate Peter McCormack during a recently released episode of the “What Bitcoin Did” podcast, renowned on-chain analyst Willy Woo expressed his growing concerns about the “financialization” of Bitcoin. According to Woo, as reported by Daily Hodl, the introduction of various derivative products has the potential to manipulate Bitcoin’s price and drain its liquidity.

Willy Woo pointed out that the financialization of Bitcoin began to take shape around 2018-2019. Various financial products related to Bitcoin, such as perpetual swaps and calendar futures, were introduced during this period. Woo argues that these derivative products have the capacity to influence Bitcoin’s price and liquidity. He specifically mentioned the “paperization” of Bitcoin, stating that large entities like governments can use these financial instruments to exert control over the market.

According to Woo, Bitcoin’s Sharpe Ratio has been on a decline since 2019, coinciding with the rise of Bitcoin-related derivatives.

The Sharpe Ratio is a financial metric used to assess the risk-adjusted return of an investment. It is calculated by subtracting the risk-free rate from the asset’s return and then dividing the result by the asset’s volatility, usually measured by its standard deviation. A higher value indicates that the investment offers better returns for the level of risk involved. In the context of Bitcoin, a declining Sharpe Ratio suggests that the cryptocurrency’s risk-adjusted returns are diminishing. This could indicate that Bitcoin is increasingly behaving like traditional financial assets, which is a point of concern for some market observers.

Woo noted that Bitcoin’s Sharpe Ratio was exceptionally high, beating all other assets, but has now dropped to levels similar to those of other macro assets like equities, gold, bonds, and emerging currencies.

Woo emphasized that Bitcoin is increasingly behaving like other macro assets, trading within a similar range. He attributes this change to the financialization that started in 2018-2019. Woo expressed concern that Bitcoin’s unique characteristics are being overshadowed as it becomes just another asset influenced by large financial entities.

Woo elaborated on the liquidity issue, stating that Bitcoin is a half-trillion-dollar asset with 21 million Bitcoins in circulation. He pointed out that if a large entity like a government were to print $1 trillion, it could potentially sell $42 trillion in Bitcoin, thereby manipulating the market. This, according to Woo, is a significant concern.

Daily Hodl also highlights Woo’s thoughts on the probable approval of a spot Bitcoin exchange-traded fund (ETF). While this could be seen as a positive development, Woo warns that it may come with the downside of larger entities gaining the ability to influence Bitcoin’s price. He mentioned that these “paper markets” have a considerable capacity to control the market, which is a point of concern for him.

Featured Image via Midjourney