While Bitcoiners often advertise the cryptocurrency as anti-inflationary “digital gold,” Bank of America says it trades like nothing like it.
A recent report from the company indicates that the crypto asset is moving much more similarly to risky assets such as stocks and reached unprecedented high correlations with the S&P 500 at the end of January.
High correlation with risky assets According to the research note – titled “Global Cryptocurrencies and Digital Assets” –Bitcoin has been trading as a risk asset since July last year. This was around the same time that the price of BTC was showing signs of significant recovery after a 50% price crash in May 2021.
Risky assets are characterized by high volatility. Stocks, real estate, and currencies all fall into this category.
“Correlations as of January 31 between bitcoin and the S&P 500 (SPX) and between bitcoin and the Nasdaq 100 (QQQ) hit all-time highs and the 99.73 percentile respectively,” reads the report. Meanwhile, the asset has maintained a close to zero correlation with gold during this period. Bitcoin is often compared to gold as an inflation-hedging asset (although gold itself doesn’t always act as such).
Unlike some other cryptocurrencies such as Ethereum, Bitcoin has a fixed supply issuance schedule. The cryptocurrency will be mined slower and slower over time until it hits a cap of 21 million coins. It stimulated some investors to use it as a hedge against rampant currency devaluation, often in preference to gold.
The bitcoin-gold correlation was stronger at the start of the pandemic, following intensive stimulus promises from global governments in March 2020. Nevertheless, BofA now believes that bitcoin will neither be adopted as an inflation hedge in countries. developed nor will it lose its active risk status until its price volatility decreases.
Bitcoin, inflation and the Fed
Although Bitcoin’s correlation to risky assets is strong, it has a low propensity to react to Federal Reserve policy and inflation statistics, albeit in unpredictable ways. In November, the price of Bitcoin hit an all-time high of around $69,000 shortly after October inflation figures came out at 6.2%, a 30-year high at the time. However, Bitcoin and stocks fell later that month, once the Fed Chairman deemed that inflation was no longer a “transitory” phenomenon.
Nonetheless, the report acknowledged that Bitcoin could work as a reliable inflation hedge in underdeveloped countries with more inflationary environments. This is visible in Turkey, where Bitcoin was trading at all-time Turkish lira-denominated highs in December, despite falling against the dollar.