Sunday, January 16

Bitcoin remains near lows as central banks prepare stimulus cuts

While Bitcoin remains near recent lows after falling from its November all-time high, many crypto investors see an overarching theme that could be behind some of the recent volatility: the prospects for reduced stimulus from the central bank.

The government and central bank stimulus efforts that have been underway for more than a year are beginning to weaken as economies globally try to emerge from the pandemic. Digital assets have come under pressure in that environment, with Bitcoin losing roughly a third of its value over the past month, a period that coincides with the Federal Reserve’s announcement that it could accelerate its stimulus withdrawal efforts.

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Bitcoin is down nearly 30% from its all-time high of about $ 69,000 reached about a month ago, while Ether, the second-largest digital asset, is down about 20%. Smaller coins have also been hit hard, with Litecoin losing more than 40% in that stretch, according to data from Bloomberg.

Meanwhile, an index of the 100 largest digital currencies has lost a quarter of its value since mid-November.

“Investors will be more discriminatory if they think they are alone and do not have the backing of the central bank,” Brian Nick, Nuveen’s chief investment strategist, said by phone. “He has seen a shift towards higher quality assets, but also assets that are more tied to the parts of the economy that we have the feeling are performing quite well or where there is a lot of demand, and away from pure speculation.”

The Fed will wrap up its final 2021 meeting on Wednesday, where it is expected to accelerate the reduction in asset purchases, a move that would allow officials to begin raising rates next year.

Although Bitcoin got off to a rocky start on Monday, shedding as much as 8.4% at one point, prices leveled off on Tuesday, with the coin changing little to around $ 46,885 at 12:08 p.m. in New York. The Bloomberg Galaxy Crypto Index, which tracks a handful of the largest digital currencies, was up 2.4% at the same time. Dogecoin, popularized this year by Tesla Inc.’s Elon Musk, was up about 20%, according to data from Messari, after the automaker said it will accept payments in meme currency for some merchandise.

To be sure, the narratives for investing in Bitcoin and other cryptocurrencies tend to change because the currency is fundamentally difficult to value. Some investors see a close correlation with riskier assets. Others argue that the currency is a good hedge against inflation, while a completely different cohort says that history proves that point is moot. For many, the shifting narratives are part of its appeal – it’s an investment for any kind of environment and it’s decentralized, meaning it shouldn’t be affected by government action.

Noelle Acheson, Director of Market Insights at Genesis Global Trading, says that Bitcoin is an asset that is not tied to the economy in any way. “So it’s going to start to find its place in portfolios in the future,” he said by phone.

Narratives will change less, he added, though he thought it would be no less volatile. “In the short term, we will see a lot of volatility,” he said. “But in the future, he will find his narrative established.”

© 2021 Bloomberg

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