Experts studying Bitcoin price movements say that despite the inflation-driven rally last week, Bitcoin is still a risk asset. The cryptocurrency hit new record highs of around $69,000 last Wednesday, after the US reported inflation at a three-year high. Accordingly, the claim that “Bitcoin is an inflation hedge” became louder. Detail Cryptocoin. com
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Bitcoin price volatility alert
Bitcoin has recently traded as a store of value in response to economic data showing high inflation. However, traditional financial experts are still not convinced by the growing acceptance of the safe-haven Bitcoin as digital gold. “The crypto rally in hyperinflation is a clue as to where it is heading as an asset class, but the sharp drop at the end of the day underscores the limitations,” said ForexLive analyst Adam Button. For now, Bitcoin is still a risky asset,” he said. Bitcoin is highly sensitive to expectations of changes in fiat liquidity. The cryptocurrency rallied sixfold to over $60,000 in the 10 months to April 2021 as the Fed prints trillions of dollars to counter the coronavirus-induced recession.
John Kicklighter, chief strategist at Forex research portal DailyFX, said, “The use of cryptocurrencies appears to be a utility (like anti-fiat) rather than a speculative tool to diversify.” Comments suggest that the cryptocurrency needs to develop resistance to stock market selloffs to strengthen its position as a hedged asset and attract safe-haven demand from traditional market investors.
CoinDesk data shows that the 60-day correlation between Bitcoin and the S&P 500 has recently risen to 0.42, which is at least an 18-month high. Another factor preventing Bitcoin from turning into a haven asset is price volatility. “Equally important to Bitcoin will be stability. Any asset with routine +5% intraday fluctuations is not suitable for a large group of investors,” said Button, adding that it will take years to consolidate his relationship with the real economy. Bitcoin’s price volatility could cool in the coming months as traders increasingly use stablecoins or fiat currency instead of cryptocurrencies as collateral for their futures contracts.
Bitcoin’s history is insufficient
According to some observers, bitcoin’s history is too short to draw any conclusions, and it may be a “risky” inflation hedge at best. Marc-Andre Fongern, senior analyst at Fongern Global FX, said, “We find ourselves in an environment of significantly high inflationary pressures, but also a completely new territory and response function for Bitcoin, in other words, Bitcoin has good inflation protection. We’ll see if that happens,” he said. Analysts at JPMorgan cited Bitcoin’s store of value appeal and rising inflation expectations as the main reasons for the cryptocurrency’s 40% rise in October. However, it is worth noting that the rally took place during the stock market rises.
Fongern said the cryptocurrency could face selling pressure if the Fed responds to inflation risks with faster contractions or even rate hikes for the foreseeable future. Kicklighter said that Bitcoin’s high volatility mainly becomes attractive when the incentive-driven market is forced to seek higher returns rather than sitting on an asset with a negative real return or inflation-adjusted rate of return. Kicklighter argues that while the perspective of individual investors may entertain BTC as a viable alternative to the dollar, the deeper money behind institutional interests will not change to Bitcoin when liquidity is a driving force.
Barometer of speculative sentiments
Currency traders still see Bitcoin as a barometer of overall risk appetite, just like Japanese yen pairs, tech and meme stocks. According to ForexLive’s Button, Bitcoin can be used for broader reading about the markets and economy, but only in broad strokes or weekly. Major moves in crypto had knock-on effects on exchanges earlier this year. For example, US stocks fell on May 19 when Bitcoin dropped 30% to $30,000.
A look at price action in Bitcoin and Australian dollar-Japanese yen (AUD/JPY), a currency market risk indicator, tells us that traditional market traders may be right to treat cryptocurrency as a leading indicator of broader risk sensitivity. The chart below shows Bitcoin leading highs and lows in the currency pair. Bitcoin bottomed out and started rising four weeks before AUD/JPY bottomed in mid-August this year, repeating the pattern observed in September-October 2020. All things considered, traditional market watchers believe that Bitcoin has yet to find its place as an inflation hedge. However, they agree that the cryptocurrency has surpassed the Rubicon.