Bitcoin Vulnerable to Macroeconomic Factors as Adoption Grows – Goldman Sachs
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Bitcoin Vulnerable to Macroeconomic Factors as Adoption Grows – Goldman Sachs

The investment banking giant believes institutional buyers diving in BTC will necessarily not have a positive effect on its price.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

A simple lesson has been relearned during this bearish January, as Bitcoin’s price dropped by 28%. While the markets surged last year, many cryptocurrency advocates were spurring adoption across all sectors. However, it was PayPal’s announced support for major cryptocurrencies in October 2020 that blasted off Bitcoin above the $30k range, and arguably started the institutional interest in what was still considered largely a fringe asset.

And the more institutional money poured in, the more Bitcoin grew. Except, that money is tightly bound to the Federal Reserve’s monetary policy.

Goldman Sachs Sees a New Macroeconomic Reality for Bitcoin

Now that the Fed’s tapering program is set to cut off access to cheap money, we have seen a Bitcoin price correction. In other words, a domino effect ensued because the Fed’s interest rate hike placed a selling pressure on institutional investors.

Authored by two Goldman Sachs strategists—Zach Pandl and Isabella Rosenberg—the report presents a thesis that there is only so much money to go around. Specifically, higher bond yields negatively influence more fringe growth assets. One example of this is Nasdaq 100, indexing tech-heavy companies outside the financial sector.

During January, the correlation coefficient between Bitcoin and Nasdaq 100 has been close to 1, the maximum positive correlation. Image courtesy of TradingView.

As the data shows, following the Fed’s more hawkish policy on borrowing, last month saw a tight correlation between Bitcoin and Nasdaq 100 index. Because the money flown into Bitcoin can often share the same origin as one that trades those companies, the Goldman Sachs report notes macroeconomic convergence.

“These assets will not be immune to macroeconomic forces, including central bank monetary tightening.”

Furthermore, because of 40-year-high inflation, the report forecasts that the Fed will increase interest rates at every Federal Open Market Committee (FOMC) meeting this year, five in total. Whatever that effect may be on the market, the analysts conclude that Bitcoin will rise or fall with the stock market’s ebbs and flows.

“While [adoption] can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

If that turns out to be the case, as it seems to be the case, can crypto adoption on a wider scale counter it?

From Nation to Metaverse Adoption

This week, the International Monetary Fund (IMF) urged El Salvador to cancel Bitcoin’s status as legal tender. This came four months after the tropical nation became the first country to make Bitcoin equal to fiat money. More so, Salvadoran President Nayib Bukele pitched ‘Volcano Bonds’ to fund the Bitcoin City project.

That future city is to be the center for Bitcoin mining, powered by geothermal energy coming from the Conchagua volcano. We may see such bond issuance this February or March if the legislation to create a new legal framework goes through.

Such development is important to note because El Salvador sets a precedent for other nations to follow and experiment. For instance, President Bukele retweeted this announcement coming out of Turkey.

Due to concerns regarding macroeconomic factors, the IMF has been largely against the crypto adoption by El Salvador and has repeatedly asked the country to abandon its Bitcoin plans. 

Nonetheless, if that happens, Goldman Sachs sees another venue that would decouple it from the equity market.

“Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets,”

We have already seen metaverse coins going through the roof in November. However, they are associated with play-to-earn (P2E) games and NFTs, which seem to be creating their own crypto market niche.

Moreover, after Microsoft acquired Activision Blizzard for $68 billion with the goal to eventually tokenize upcoming games, stablecoins may present a better ramp than Bitcoin.

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Goldman Sachs Stablecoin on Hold

Goldman Sachs report also brought some news on stablecoins, effectively serving the role of Central Bank Digital Currency (CBDC), but in private hands. The bank had previously hinted at exploring its own GS coin. In fact, the bank invested in Circle, the firm behind USD Coin (USDC), alongside Coinbase.

However, it seems that new stablecoins are not on the cards. Not only is Meta’s Diem project getting canceled, but there are no practical plans to push out GS coin.

“We continue to see value working closely with private institutions looking to create a ubiquitous stablecoin that meets legal and regulatory requirements and has transparent governance.”

This could be a reference to Paxos (USDP), the most regulated stablecoin, as Paxos was given chartered trust company status by the New York State Department of Financial Services (NYDFS).

On the other hand, USDF (USDForward) stablecoin by USDF Consortium, could become the go-to stablecoin for institutional investors. Although the Consortium consists of small-cap banks, major VC investors are backing the project via FinTech firms JAM FINTOP and Figure Technologies.

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Do you think Goldman Sachs’ prediction is wrong? If so, why? Let us know in the comments below.