(Bloomberg) — Bitcoin was lumped in with other speculative investments in the run-up to the Federal Reserve’s last tightening cycle, falling on expectations that rising interest rates would dampen risk appetite. Now, with renewed optimism that borrowing costs could soon come down, proponents of the biggest cryptocurrencies are saying they will become more similar to high-growth assets such as stocks in technology companies. It is claimed that
These days, the token is being traded as is. This week, the 90-day correlation coefficient for the digital currency and tech-heavy Nasdaq 100 index hit 0.46, the highest level since late August. A factor of 1 means the assets are moving synchronously, and a negative 1 means the assets are moving in opposite directions. After the Fed began raising its target rate for overnight lending among banks in early 2022, the correlation jumped to more than 0.8, the highest since digital assets emerged into mainstream consciousness.
“People are looking back at cryptocurrencies as a growth asset or an asset that represents network value,” said Joshua Lim, co-founder of trading firm Alberos Markets. “Its ability as a technology and value transfer mechanism means that it becomes more correlated with other assets that are also experiencing significant growth, such as the Nasdaq and tech stocks.”
Supporters of Bitcoin have long touted it as an uncorrelated asset, one that is not beholden to governments and less susceptible to external forces and factors. When it was first introduced to the world in 2008 by an anonymous person, or group of people, known as Satoshi Nakamoto, the goal was to create a decentralized currency outside of the control of governments and central banks. Over the years, it has been championed in various forms as a digital version of gold, an inflation hedge, and a store of value. Bitcoin price fluctuations have upended many of these narratives. The approval earlier this year to allow U.S. exchange-traded funds to hold Bitcoin directly opened the token to a new class of investors.
Toby Winterflood, Chief Product Officer at CCData, said: “Since the beginning of 2024, we have seen a significant positive correlation between the S&P 500 and Bitcoin. “This completely destroys the theory that it is a means of preservation.” “I really think the main reason we're seeing all-time highs right now is because of the way the ETFs reach actual maturity, which is some of the fastest-growing ETFs in history.”
Bitcoin has soared since the ETF launched in January, reaching a record of around $74,000 in March, but the gains have tapered as demand for the investment vehicle has begun to cool. The token rose about 1.4% to around $66,200 on Friday and is up almost 10% this week. Bitcoin is up about 58% this year, compared to the Nasdaq 100's 11% rise.
“These were big incentives for traditional allocators outside of crypto to start paying attention to this asset class and start buying,” Lim said of the US ETF, which saw Bitcoin hit an all-time high in March. He spoke while referring to the fact that blockchain usage has halved. During April. “Now that those catalysts are over, the focus is just on the broader macro picture.”
Data released Wednesday showed underlying U.S. inflation fell in April for the first time in six months, providing some progress in the direction Fed officials want to see before cutting interest rates. The core consumer price index, which excludes food and energy costs, rose 0.3% from March after beating expectations for three consecutive months. Still, multiple Fed officials said Thursday that the central bank should keep borrowing costs high for an extended period of time as policy makers wait for further evidence that inflation is easing, prompting interest rate cuts. This suggests that it is not.
“If the Fed lowers interest rates, I think it's generally going to be bullish for risk assets,” Lim said. “If that happens, it will be bullish for cryptocurrencies as well.”
While more crypto investors have turned their attention back to the Fed, CCData has found that Bitcoin's growth and resilience has remained fairly stable since the release of the US ETF, Winterflood said.
“It will be interesting to see what happens” if the Fed cuts rates in the coming months, Winterflood said. “The question is whether Bitcoin will behave as before and become an asset that is seen as riskier, or whether it will actually start to become just an alternative asset seen by traditional markets.”
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