Friday, January 21

Bitcoin is once again a risk asset and not a haven


Speculative stocks on Monday had a rough day, as did Bitcoin and other cryptocurrencies. For some market watchers, that is not a coincidence.

The 100-day correlation coefficient for Bitcoin and the S&P 500 stands at 0.33, among the highest readings of the year. That means that when stocks go up, Bitcoin is likely to do the same and vice versa. (A coefficient of 1 means that the assets are moving in unison, while minus 1 would indicate that they are moving in opposite directions.)

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“The recent decline in Bitcoin and the rest of the cryptocurrency ecosystem has been linked to the sell off in riskier growth names,” Art Hogan, chief market strategist at National Securities, said by phone. “So you’re seeing cryptocurrencies break off and you’re seeing high-growth names drop.”

Cryptocurrency advocates have long argued that Bitcoin and other digital assets, because they are an idiosyncratic asset class, could act as hedges against swings in other areas of the financial market. That proposal is currently being tested as the most speculative areas of the market come under pressure amid expectations that interest rates could rise much earlier than expected.

On Monday, losses were recovered in the very high-priced tech names, including companies whose growth expectations have drifted further in the future. That’s happening as the bond market has started trading at higher odds for rate hikes next year after President Joe Biden chose Jerome Powell for a second term at the head of the Federal Reserve.

Bitcoin lost as much as 6.5% during Monday’s session. The largest cryptocurrency is down nearly 20% from an all-time high reached on November 10. Prices leveled off Tuesday, with the digital token gaining roughly 2% at $ 57,420 as of 1:59 pm in New York.

“Big-cap tech names have become synonymous with risky / risk-free trading. When large-cap tech names move significantly, other venture assets move in tandem, ”said Matt Maley, chief market strategist at Miller Tabak + Co.

The prices of everything from food to staples to housing have risen and many notable Wall Street investors and analysts have embraced the idea of ​​using cryptocurrencies as a hedge against that trend. Economists at Bloomberg Economics had estimated that about half of Bitcoin’s recent returns can be explained by inflation fears, with the other half coming from market exuberance and business momentum.

But there are also plenty of counterarguments, notably that Bitcoin hasn’t been around long enough to polish its inflation hedging image. Also, according to Cam Harvey, a Duke University professor and Research Affiliates partner, it behaves too much like a speculative asset and is prone to periodic crashes.

Marc Chandler, chief market strategist at Bannockburn Global Forex, said he would like to see a sample size larger than a few trading days. This is because Bitcoin’s moves are based, in the short term, on a number of different factors and, for example, the next hotter-than-expected inflationary impression could see it rise as well.

“It’s almost like the whack-a-mole game, where every day people try to connect it with new things,” Chandler said. What really determines the value of Bitcoin? I think that just shows the problem we have: what drives it? And if something different drives it every day or in the short term, one day it is inflation, the next day it is technology, how is it managed? ”

© 2021 Bloomberg


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