THE CRYPTOVERSE-Teenage bitcoin launches an interest rate crisis

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Stock chart lighting is seen over representations of the virtual currency Bitcoin in this illustration taken March 13, 2020. REUTERS/Dado Ruvic

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Jan 25 (Reuters) – Bitcoin is growing. The original cryptocurrency turns 13 this year and shows signs of becoming a more mature financial asset – but watch out for teenage tantrums.

This drift into the mainstream, driven by big bets from institutional investors, saw bitcoin become interest rate sensitive and fueled a selloff in the coin this month as investors braced for a hawkish political meeting. of the Federal Reserve.

The cryptocurrency, born in 2009, was still on the fringes of finance during the previous Fed tightening cycle, from 2016 to 2019, and barely correlated with the stock market.

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The times have changed.

Bitcoin has been positively correlated with the S&P 500 Index (.SPX) since the start of 2020, according to data from Refinitiv, meaning they go up and down broadly together. Their correlation coefficient rose from 0.1 in September to 0.41, where zero means no correlation and 1 implies perfectly synchronized movement.

In contrast, this coefficient was only 0.01 in 2017-2019, according to an analysis by the International Monetary Fund published this month.

“Now that bitcoin isn’t fully owned by early adopters, it’s in a 60/40 type wallet,” said Ben McMillan, chief investment officer of Arizona-based IDX Digital Assets, referring to the institutional strategy of allocating 60% of a portfolio. to relatively risky equities and 40% to bonds.

“It’s no surprise that it’s starting to trade with a lot more interest rate sensitivity.”

Bitcoin closed below $40,000 for the first time since August 2021 on Friday, a far cry from its November peak of $69,000.

Bitcoin SPX Correlation

HEDGE AGAINST INFLATION?

The crypto market is increasingly characterized by large investors, rather than the small retail players who drove its early moves.

Total assets under management for institutional crypto investment products rose in 2021 from $36 billion in January to $58 billion in December, according to data provider CryptoCompare.

On top of that, there were exceptional buys from companies like Tesla (TSLA.O) and MicroStrategy (MSTR.O), as well as hedge funds adding crypto to their portfolios.

“The cryptocurrency ecosystem has grown from a total market valuation of $767 billion at the start of the year to $2.22 trillion at the end of the year,” CryptoCompare said.

The drift towards traditional finance raises broader questions in 2022 and beyond about whether bitcoin can maintain its role as a diversification game and hedge against inflation.

The IMF researchers said bitcoin’s growing correlation with equities limits its “perceived risk diversification benefits and increases the risk of contagion in financial markets.”

Bitcoin is also often seen as an inflation hedge, primarily due to its limited supply similar to gold, the most established store of value in an inflationary environment. However, its correlation to equities has seen it become increasingly troubled with broader markets by the biggest annual rise in US inflation in nearly four decades.

“In the current case, bitcoin is not acting as an inflation hedge. Bitcoin is acting as a proxy for risk,” said Nicholas Cawley, strategist at London-based DailyFX.

Jeff Dorman, CIO of Los Angeles-based digital asset management company Arca, added: “It’s also a little ironic given that the bull case for many digital assets in the spring of 2020 was inflation expectations. higher. Now that we actually have inflation, it’s weighing on prices.”

Bitcoin and traditional inflation hedges

“WAITING FOR HIGHER PRICES”

There is mounting evidence that investors are increasingly clinging to bitcoin over the long term. Read more

Kraken Intelligence, a research blog for cryptocurrency exchange Kraken, said around 60% of all bitcoin in circulation had not changed hands in more than a year, the highest level since. December 2020.

Meanwhile, funding rates for perpetual swaps on major exchanges — indicative of the sentiment of investors betting on future bitcoin price movements — were relatively stable, hovering around 0.01%, according to the data platform. Coinglass.

Positive rates imply that traders are bullish because they have to pay to hold a long position, while negative rates mean that traders have to pay to hold a short position or bet on falling prices.

Investors are showing a noticeable reluctance to spend coins, according to blockchain data provider Glassnode.

“In the face of tumultuous and unconvincing price action, this indicates that this cohort of holders is patiently waiting for higher prices to spend their respective supply,” he said.

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Reporting by Lisa Pauline Mattackal and Medha Singh in Bengaluru Editing by Vidya Ranganathan and Pravin Char

Our standards: The Thomson Reuters Trust Principles.

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