Bitcoin (BTC) has been battered badly over the last quarter; it lost nearly 58% of its value, its worst quarterly performance in over 11 years. There have been several reasons for the current sell-off; however, there are two critical factors that need the most attention.
1. Collapse In Crypto Confidence
A broader flight from risk happened during the second quarter of this year, primarily due to the lack of confidence in the crypto market, largely triggered by the now infamous collapse of the U.S. dollar-pegged stablecoin UST and its token Luna, which wiped out $60 billion of wealth from the crypto market.
This led to a domino effect: Celsius, a lending platform, which promised unsustainable higher yields on digital currencies deposits, paused withdrawals for customers, blaming this extremely volatile situation. According to recent headlines about the firm, Celsius could be standing on its last leg before its collapse. Crypto fund Three Arrow Capital defaulted on a loan worth more than $670 million. There have also been reports that another major crypto lending platform, BlockFi, could be bought in a fire sale for $25 million, a drop of 99% in the company’s private valuation.
Generally speaking, whenever there is a panic in the market, it doesn’t matter if we are speaking about digital assets or traditional markets; capital control and domino effects play out in similar ways, such as we saw during the financial and European debt crises.
2. Inflation hedge
Perhaps the most common question among investors nowadays is why Bitcoin’s price hasn’t moved higher as inflation readings in the U.S. and Europe have printed their multi-decade highs. After all, bitcoin is supposed to be just like gold and provide a hedge against inflation and risk. This particular reputation element of Bitcoin has been damaged, and there are still no clear answers for this.
One clue can be found in the correlation between the increase in the dollar supply and Bitcoin’s price. This can be seen by plotting the U.S. 10-year Treasury yield against the bitcoin price. The data from the past five years indicates that when the Fed reduces the money supply, the price of bitcoin takes a nose dive. When the Fed increases the money supply, as it did during the covid crisis, bitcoin prices experience a rally, and generally, a new high is formed.
From a money supply perspective, things aren’t looking that promising, and the current crypto winter may last until the Fed begins its asset purchase program again, thus increasing the supply of money.
Hedge Against Risk?
During the second quarter, we saw a rout for U.S. stocks; the S&P 500 index recorded its worst performance for the first half of the year since 1970. Bitcoin, which is supposed to act as a risk-off asset, also went down, contradicting its reputation as being a sort of a digital gold, a source of safety from declines in stocks.
That’s not to say that if Bitcoin doesn’t act like a risk-off asset, there will be no future for bitcoin. But investors who always looked at bitcoin as a hedge against uncertainty need to rethink their portfolio strategy. As a result, we may see bitcoin sitting with riskier assets, and investors will have to let go of bitcoin’s reputation as a risk-off asset. Rather than being seen as a kind of digital gold, bitcoin is in the process of forging its own unique identity, one that defies easy comparisons to other kinds of assets. Investors will need to adjust accordingly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Source link
