Bitcoin’s “hedge” story is dead as speculative price action continues


Key Takeaways

  • The cryptocurrency has rallied to start the year amid expectations that interest rates will be cut sooner than expected.
  • This contradicts the idea that cryptocurrency is unrelated and proves it false
  • An assessment of cryptocurrency price action through the pandemic and subsequent rate hike period shows an extremely risky asset class that moves in line with other speculative asset classes.

Over the past few months, markets have turned green amid softening inflation data around the world. With digital assets surging to their strongest rally in 9 months, cryptocurrency was not left out of the invite list.

If there was any doubt (and by now, there really shouldn’t be), this proves once and for all that any narrative of a non-cryptocurrency asset is dead.

Pandemic bull run

To quickly wrap up the past few years in cryptocurrency, the asset class initially moved strongly higher as central banks around the world implemented ultra-low interest rate policies.

As economies move toward a standstill for the latest black swan, the COVID-19 pandemic, nations faced a highly uncertain outlook in the first quarter of 2020. societies.

Unprecedented stimulus packages were released.

With all this stimulus and generational cheap money, risk assets have gone bananas. The biggest leader was cryptocurrency. Some argued that the assets were rising as a result of the inevitable inflation that would result from all this expansionary monetary policy, as cryptocurrency was a hedge against the fiat system. The argument would not stop.

Transition to a new interest rate paradigm

2022 really brought a spike in inflation, and this time central banks were forced to do the opposite – raising rates aggressively as the cost of living rose relentlessly.

This curbed risk assets according to the playbook. Liquidity is removed from the system, stifling demand. Investors now have alternative vehicles to park their wealth and earn income, with government-guaranteed FDI now offering reasonable alternatives, unlike earlier zero rates (or negative in some countries).

But cryptocurrency has followed the rest of the world’s risk assets. Not only that, but the scale of the collapse in the sector was unlike anything we’ve seen in a major asset class in a long time. Bitcoin has shaved more than three-quarters of its market cap, and many have outperformed altcoins that have been decimated.

Now, the last few months have brought more optimistic readings on inflation. The numbers are still scary, but there has been some positivity that the worst may be over. Of course, there’s still war going on in Europe and there’s now growing fear that a recession may be imminent (if it’s not already here), but hey – let’s celebrate what we can win.

Stocks cautiously edged higher as the market shifted to expectations that higher interest rates would end sooner than previously expected.

The only thing is that the cryptocurrency also went up. Not only that, it printed gains that blew the action in the equity markets out of the water.

You know that suggests that there may not be an inflation hedge at all. As inflation recedes and the prospect of lower rates and another expansionary cycle grows, the cryptocurrency is rising. Go with the figure.

Correlation against the stock market remains high

The proof is in the pudding. Simply looking at the S&P 500 and Bitcoin price chart, it is clear that the correlation is sharp – the main hidden variable is interest rates.

Quite literally, cryptocurrency is the opposite of a non-correlated asset – it has fallen in step with the stock market in the last few years.

Interestingly, however, there were periods of separation. Unfortunately, they came amid crypto-specific crashes. To illustrate this, I plotted the Bitcoin/S&P 500 ratio against the price of Bitcoin over the past few years.

The correlation has been high except for a few notable periods – all of which occur when the price of Bitcoin has fallen sharply. The most recent example was in November 2022, when the cryptocurrency was rocking during the FTX crash.

There’s really no argument here. Crypto is a highly correlated, highly risky asset. The only question is, can he shake off that moniker in the long run? Any idea that’s not currently wildly speculative is broad.



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