The Best Performing Bitcoin Asset Class of 2023 Opposite Inflation Hedge

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Just under a month into the bright new year of 2023, and markets are heating up.

Inflation has slowed considerably over the past two months. The plague of markets throughout the past year has given investors hope that the Federal Reserve will abandon its hawkish interest rate policy sooner than expected.

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It’s been nearly a year since the economy transitioned to this new interest rate paradigm, with rates going from zero to over 4% and counting.

Inflation down, markets loose

Rates were the weapon of choice in the fight against the worst inflationary crisis since the 1970s. As the CPI numbers got hotter and hotter, it became clear that there was a big problem. The Fed knew it, and it didn’t hang around – setting off one of the fastest bull cycles we’ve ever seen.

It worked. At last. Inflation started to come down.

In fact, the main fear now is that the tightening cycle has gone too far, with fears that a recession is looming as the main cause of market hesitation, rather than inflation.

Ironically, if you need proof that inflation is falling, all you need to do is check how much cryptocurrency prices are rising – it’s almost as indicative as the CPI report itself.

I say ironic because cryptocurrency, or rather Bitcoin in particular, was previously touted as an inflation hedge. Its capped supply is programmed not to degrade, unlike its fiat counterparts, according to the theory.

Of course, nothing could be further from the truth. The USD may have lost 10% to inflation over the past year, but Bitcoin has lost 75%. Go figure.

Now, with inflation slowing, Bitcoin (BTC-USD) is back in the game. It is up 38% on the year, trading at $23,000 after a brutal year. This is the strongest rally in 9 months for the sector.

As it has for a long time, it continues to trade as a high-risk asset, so it benefits more than most expectations from a more dovish monetary cycle ahead.

The chart below compares it to the Nasdaq (IXIC), the tech-heavy stock index, its correlated but less volatile cousin, which is also off to a strong start to the year, up 8%. It fell by 33% in 2022.

Bitcoin the best performing asset class of 2023

In fact, in Goldman Sachs’ cumulative report this week, it even announced Bitcoin as the best performing asset class of the year so far. It assessed the Sharpe ratio of different asset classes, meaning it plotted the price increase against the volatility of each asset class.

Obviously, this is just a sample 25 days, but after what was a hellish year last year, the respite is a huge win for crypto investors.

It’s important to remember why, though. There is no underlying positive news coming from the industry this year that justifies a 40% price pump. In fact, the news cycle has been quite negative. Crypto lender Genesis has filed for bankruptcy, rumors continue to swirl around Gemini, while other layoffs have taken place at Coinbase, Crypto.com and a host of other crypto companies.

But as we now know, Bitcoin trades as an extreme risk asset. And with inflation falling and hopes of a Fed pivot rising, that means it’s going to rise. Don’t call it an inflation hedge.

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