Bitcoin’s (BTC-USD) performance may be heavily correlated with risk assets like long-term tech stocks, according to an industry expert.
“Now we have a non-zero correlation between Bitcoin and risk assets, in particular long duration tech stocks, things like that,” said Nic Carter, a partner at Castle Island Ventures and a co-founder of Coin Metrics in a recent Yahoo Finance Live segment. “And that's the flip side of Bitcoin and other cryptocurrencies being financialized and being incorporated into the mainstream financial apparatus: you're exposed to the behavior of more mainstream investors.”
Bitcoin continued falling this week, yet still has stayed afloat above the precipitous “death cross” threshold — a bearish indicator occurring when the 50-day moving average drops below the 200-day moving average. At the time of writing, Bitcoin hovered around $42,000, down about 10% in the last month and more than 35% from it's all-time highs.
Similarly, tech stocks have faltered within the past few months. Macroeconomic issues have had a hand in dampening prospects for risk assets to begin the year, as inflation concerns dominate national financial headlines. Last month’s Consumer Price Index report measured inflation of 7%, the highest level since the early 1980s.
The Federal Reserve has told the public that it would commence with a more hawkish monetary policy to curtail rampant inflation in 2022, which could mean two, three, or even four rate hikes.
In response, tech stocks have fallen steadily. The Nasdaq Composite (^IXIC), which contains many of the biggest publicly-traded tech companies, has fallen nearly 10% from its November highs.
Bitcoin and other crypto suffer from many of the same volatility troubles as other risky assets in part because it is subject to the same animal spirits as these cyclical stocks, Carter said.
“[Crypto is] a cyclical asset class,” he said. “And every cycle you get new entrants that are excited by the hype and want to pile into something interesting and new without a full appreciation for the underlying fundamentals and the purpose of the assets, frankly. This cycle, we've seen an enormous amount of investment, malinvestment you could say, in assets that really don't make any sense.”
In response to investor demand, Carter went on to say, entrepreneurs create greater quantities of these assets. For Bitcoin, this can consist of increased mining and trading activity. For other crypto tech, including NFTs and a plethora of smaller cryptocurrencies, entrepreneurs can start new coins and tokens and sell them to investors. “You're seeing a lot of new supply come online for a lot of these hot new tokens that attract a ton of investor dollars this year,” he added. “And so that's adding pressure to the price.”
As cyclicals have underperformed to begin the year, investors have turned to an old favorite — gold — to hedge against inflation. Gold futures rose Wednesday after an uncharacteristically slow start to 2022.
“I think the long-term objective is still, as far as Bitcoin is concerned, to eventually replace something like gold which is worth over 10 times what Bitcoin is worth in the aggregate,” Carter said.
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.