Crypto Diehards set to find out if it really was a bubble

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(Bloomberg) – For true cryptocurrency supporters, Bitcoin is the ultimate store of value, the strongest hedge against runaway inflation made by reckless central banks and their money printing. To skeptics, the crypto world as a whole is a mirage whose massive surge beyond $ 2 trillion was simply the speculative byproduct of the extraordinary amount of easy money flowing through the economy. world in fact, a big bubble.

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These two theories are about to face their biggest test yet.

Bitcoin, the original cryptocurrency, arose over a decade ago from the ashes of the global financial crisis as a bypassing of banks and government agencies mired in the great Wall Street calamity at the time. The digital token has steadily grown in popularity, inspired a wave of aspirants, and endured wild rides. But it wasn’t until the next big crisis, Covid-19, that the market really took off.

Crypto exploded after March 2020, when the Federal Reserve and Congress triggered billions of dollars in stimulus measures to soften the economic blow from the pandemic. Much of that money ended up in digital assets, supercharging prices. Bitcoin climbed 305% in 2020 and hit another 60% the following year, hitting a record high of nearly $ 69,000 in early November. Since then, however, it has seen a relentless decline, largely weighed down by the hawkish central bank fulcrum. Now, with the growing odds that policymakers will embark on a series of rate hikes as early as March, one of the many steps they are supposed to take to eliminate liquidity, it remains to be seen whether the crypto ecosystem can. hold on without it.

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That doesn’t look good so far: Bitcoin is already down some 40% from its highs, while the # 2 Ether coin and other altcoins have seen big declines as well.

If they were going to hike rates three times in 2022 and keep the program going, and the era of low rates is over, we were really going to see how much people believed in their Bitcoin-crypto thesis, said Stéphane Ouellette, director. general and co-founder. from crypto platform FRNT Financial Inc. I would expect the Fed to become more hawkish and that is very bad for valuations.

Michael ORourke, chief market strategist at JonesTrading, agrees. The Federal Reserve’s seemingly perpetual asset purchases have been the cornerstone of crypto investing, he said. If the central bank followed the path set out in its latest press release, which showed Fed officials are prepared to move faster than expected to raise interest rates and potentially shrink banks’ balance sheets, it would immediately undermine the bullish thesis. key behind Bitcoin. and many other cryptos, ORourke said.

For most of its 13-year history, Bitcoin has benefited from an easy monetary policy environment and zero or negative rates. While there is no direct line between Fed coffers and orders to buy Bitcoin on exchanges, there is a connection, according to David Tawil, chairman of ProChain Capital, a crypto hedge fund. On the one hand, the Fed’s purchase of any type of asset can have spillover effects and push up the prices of other investments. All the purchasing power, all the investment power that there is has to go somewhere, he said over the phone.

Second, with rates at their lowest, investors were forced to scour the market for higher yielding opportunities and many turned to crypto given its ability to post outsized gains. Think of a junk-bond investor who was used to high single-digit returns even on bad days, Tawil said. He’s going to be forced to put money into something more risky, but, more importantly, something that pays something he’s used to getting.

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So what happens when financial conditions tighten? The initial move is the opposite of what happened when they put the money in everything and went the other way, until it took hold, Tawil said. This is why you have this immediate reaction in the market because everyone anticipates that the money is going to leave the riskier things.

The last time the U.S. central bank hiked rates was in December 2018, its last increase in a series of hikes. At the time, Bitcoin was trading at around $ 3,700, and concepts like decentralized finance and non-fungible tokens were years away from entering the vernacular. It turned out to be a tough year for the original cryptocurrency, especially towards the end when Bitcoin has lost over 40% in the past two months, a period that also coincided with a drop in stocks. American.

That momentum is repeating itself now, with Bitcoin following in the footsteps of high-value stocks ahead of another round of expected Fed tightening, said Peter Boockvar, chief investment officer at Bleakley Advisory Group and editor of The Boock Report.

For now, it turns out that this is only a risk / risk-free asset, he said. I expect it to trade with other risky assets in response to the Fed tightening. Boockvar compared the digital coin to the Cathie Woods ARK Innovation ETF, which is seen as the ultimate risky asset and has also been found to be very sensitive to Fed tightening as investors start to pay more attention to evaluations.

Bitcoin, however, remains a supreme shapeshifter. He has meant a lot to a lot of people for over a decade now and his (often conflicting) stories will continue to evolve. After all, he’s been repeatedly seen as dead, denounced as rat poison, and blasted like a bubble only to come back stronger each time.

And as institutional adoption increases, the future of Bitcoins may also become clearer, says Max Gokhman, chief investment officer at AlphaTrAI, who is working on an application of its artificial intelligence algorithms for the digital asset space. .

We shouldn’t ignore that in the future, Bitcoin’s use cases could evolve to reinvent themselves and gain in importance, he said.

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