Bitcoin’s Maturity: How Non-Crypto Macro Factors Are Impacting the Digital Asset
There’s a lot of talk about the macroeconomic and geopolitical factors that are affecting the financial markets right now, like inflation, the war in Ukraine and the possibility of a recession. Discussion of the macro factors is generally limited to their impacts on the traditional markets.
However, we’re clearly seeing those macro factors impacting the price of bitcoin as well, suggesting that the cryptocurrency is maturing in terms of its position as an asset class. Traditionally, only crypto-related news moved bitcoin and other cryptocurrencies, but today, key macro factors are impacting prices.
Is Bitcoin an Inflation Hedge?
Top of mind for many people lately has been inflation, and this is one macro factor that crypto enthusiasts have been eyeing for months. The debate about whether bitcoin would be an effective inflation hedge was derailed as its price plunged while inflation soared.
For bitcoin to serve as an inflation hedge, its price must hold up well when inflation is skyrocketing as it is now. However, the cryptocurrency has become so closely correlated with the stock market that its price has plummeted alongside U.S. stocks, particularly the Nasdaq indices.
One reason so many crypto fans had thought bitcoin would serve as an inflation hedge is because of the widespread references to it as “digital gold.” Traditionally, the price of gold has risen alongside inflation. This time around, gold has been holding up pretty well, although it remains locked firmly between $1,810 and $1,870 an ounce due to the many other factors impacting it.
How Does Inflation Affect Bitcoin?
As far as bitcoin, we learned late last year and earlier this year that it didn’t act like digital gold at all. The cryptocurrency did not offer a safe haven for investors, nor did it offer protection as a store of value whose price kept pace with or rose faster than inflation.
Over the last 50 years, inflation has slashed the value of the U.S. dollar by 85%, but bitcoin’s plummeting price has boosted the dollar’s purchasing power against the cryptocurrency. So while crypto enthusiasts wanted bitcoin to be a safe haven and a powerful inflation hedge, that theory has been disproven, leaving them sorely disappointed.
At best, inflation has no impact on bitcoin, and at worst, inflation has proven to be bad for the cryptocurrency. Since this may be the first time macro factors have played key roles in affecting crypto prices, more information is needed to judge inflation’s impact on bitcoin.
Interest Rates and the Federal Reserve
Next up, we have interest rates. The Federal Reserve has been dramatically affecting asset prices this year as it attempts to combat inflation. As the central bank continues to raise interest rates steadily, investors are tuning in to everything Fed Chair Jerome Powell has to say.
This week in his testimony before the Senate Banking Committee, he warned that their steep rate hikes could tip the U.S. into a recession. Powell also said it would be “very challenging” to engineer a soft landing, suggesting that a hard landing and recession are more likely.
The consensus among market participants is that the Fed will hike interest rates throughout the year until the federal funds rate hits 2.75% to 3%. Since inflation is running at its highest levels in 40 years, there’s no denying that all those rate hikes are necessary, but there will also be significant fallout in asset prices.
As rates rise, the cost of capital increases, essentially reducing the amount of money circulating in the economy. Corporate earnings tend to fall as consumers spend less and fewer people borrow money, which means the housing market declines because fewer people are taking out loans to buy houses.
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What Happens When Rates Rise?
Consumers have less disposable income, which means they have less money to invest. High interest rates tend to weigh on growth stocks and give some value stocks a boost. Given that bitcoin has become highly correlated with the tech-heavy Nasdaq, it’s no surprise that rising interest rates have been bad for it. Financials stocks tend to benefit from higher rates, which boost their earnings.
Additionally, investors may be less interested in investing in any stock due to the risk. Higher interest rates mean higher savings rates as well. In the bond market, higher interest rates mean lower bond prices but higher yields. Newly issued bonds become more attractive than older bonds that were issued when rates were low.
However, the macroeconomic and geopolitical turmoil has even struck the bond market this year. By some measures, the bond market’s collapse this year has been the worst in the U.S. in at least 50 years. The reason is that investors have been bracing for ever-rising inflation.
As a result, some might even say that bitcoin’s collapse was inevitable because the market rout hit every asset class, even bonds, which usually benefit from rising interest rates.
How Do Rising Interest Rates Affect Bitcoin?
Due to bitcoin’s relative newness, more data is necessary to understand the impact rising rates would typically have on bitcoin, but we can make an educated guess based on what happens to other asset classes.
Due to its positive correlation with tech stocks and the fact that bitcoin is seen as an extremely risky asset, it makes sense that bitcoin is now falling as interest rates rise. However, it hasn’t always been this way.
In its “2022 Digital Asset Outlook,” CoinShares noted that bitcoin has historically been very sensitive to interest rate hikes. However, the firm also predicted that bitcoin would behave more like gold and other real assets during the current rate-hiking cycle.
CoinShares strategist James Butterfill pointed out that bitcoin rose 51% in the six months after the initial rate hike in 2015. He also noted that the cryptocurrency has matured significantly since then, which is why he predicted that it would behave more like real assets, which tend to increase in value during inflationary periods.
What Type of Asset is Bitcoin?
Predicting the bitcoin price a month from now is as hard as it’s ever been. Over the years, various experts have attempted to place bitcoin in different asset buckets. Looking at how the many macro factors impact the cryptocurrency’s price can help us determine what kind of asset it is and how it might react to different scenarios.
Some crypto enthusiasts have classified bitcoin as a currency, while others have tagged it as a commodity. While the lack of history makes it difficult to classify the cryptocurrency, its recent behavior places it firmly in the risk asset category. Bitcoin has become positively correlated with stocks, especially tech stocks, so when growth stocks have sold off this year, so has bitcoin.
It’s looking more and more like a recession is possible or even likely, so crypto investors must figure out what to do with bitcoin. Warren Buffett famously advised investors to be greedy when others are fearful and fearful when others are greedy.
Given how fearful most investors are right now, it seems an apt time to be greedy by loading up on risk assets when everyone else is running for the hills. Every investor must ask how long they will be able and willing to hodl (hold on for dear life) on before they will capitulate to the market’s downfall.
What macro factors do you see affecting the bitcoin price now? Share your thoughts in the comments section below.