This year, bitcoin has behaved more like a risk asset than a hedge against inflation.
The investment thesis for cryptocurrencies like bitcoin has changed in 2022 as the sector has plunged alongside tech stocks, experts suggest.
In previous years, bitcoin was touted as “digital gold” and an asset class with little or no correlation to others.
However, in the first half of the year, digital currency was increasingly correlated with stocks and other risk assets. Despite a slight recovery in recent days, bitcoin was down 36% since the beginning of the year at the close of the market on May 17. Technology stocks such as Amazon, Netflix and Meta Platforms (formerly Facebook) are down about 32%, 68% and 40%, respectively, since the beginning of the year.
On May 12, bitcoin even plunged below US$26,000 for the first time since December 2020. More than US$200 billion was wiped out of the market that day.
Alex Tapscott, managing director of the digital assets group at Ninepoint Partners, which manages the Ninepoint Bitcoin ETF, observed a growing correlation between bitcoin and technology stocks over the course of the year.
“It tells me two things: First, it’s an asset class that is more widely owned. It is owned by many institutions, it is quoted in the mainstream media. It is therefore beginning to trade as a more conventional financial asset, he analyzes. But it’s also a bit disappointing, as one of the big attributes of bitcoin, historically, is that it’s uncorrelated, which can improve measures of risk-adjusted returns when added to a portfolio. »
Alex Tapscott believes, however, that bitcoin will regain this role as an uncorrelated asset in the medium and long term. “But it’s clear that in times of financial stress, in all markets, it starts to converge on the performance of other types of assets.”
Greg Taylor, chief investment officer at Purpose Investments, believes that a certain type of investor could contribute to bitcoin’s turbulence.
“It feels like a lot of investors who have taken riskier positions – whether in technology, startups or private assets – also hold bitcoins. So those parts of the wallet are affected,” says Greg Taylor, whose company manages various Bitcoin and Ether NDFs.
“They could also just sell anything to meet margin requirements or to pay bills.”