- Bitcoin demonstrates strong correlation with other risk assets like tech stocks over the past several weeks, undermining its role as a portfolio diversification tool.
- More bitcoin wallets are turning to holding, so a small amount of traders responding to macro factors are having an outsized influence on bitcoin volatility.
On Friday, tech stocks staged a mini-rebound at approximately the same time that bitcoin reversed course, spotlighting the cryptocurrency’s tendency to move in lockstep with other risk assets and undermining its alleged role as a portfolio hedge.
Lower-than-expected U.S. retail sales in December and declining consumer sentiment had some traders betting that the Fed would not be too hasty in hiking rates, even as benchmark Treasury yields soared to multi-year highs.
But the near-term correlation between bitcoin and high-growth tech stocks may not be fully reflective of the nature of the asset class.
Blockchain analysis has revealed that the amount of bitcoin that appears to be trading during these periods where markets have been roiled by everything from potential interest rate hikes to rising inflation numbers has been relatively shallow.
Given that more bitcoin addresses are turning into “hodling” addresses than ever, there’s a growing view that the cryptocurrency which is traded, consists almost primarily of short-term speculators, who are more sensitive to short term macro factors.
Nonetheless, the past week has seen cryptocurrencies rise and fall alongside tech stocks, with both assets coming under relentless pressure of a suddenly hawkish U.S. Federal reserve.
Bitcoin now enters an unprecedented era – for much of its 13-year history, the cryptocurrency has enjoyed an environment of easy monetary policy and zero or negative interest rates, fueling its ascent and its investment case.
But the prospect that the halcyon days of easy money may be at an end are roiling both cryptocurrencies and tech stocks, with volatility heightened as the Fed prepares to withdraw pandemic-era stimulus.