(Our weekly analysis of the wild world of cryptocurrencies)
By Lisa Pauline Mattackal and Medha Singh
Jan 25 (Reuters) - Bitcoin is growing up. The original
cryptocurrency turns 13 this year and is showing signs of
becoming a more mature financial asset - but watch out for the
teenage tantrums.
This drift towards the mainstream, driven by the big bets of
institutional investors, has seen bitcoin become sensitive to
interest rates and fuelled a sell-off in the coin this month as
investors braced for a hawkish Federal Reserve policy meeting.
The cryptocurrency, born in 2009, was still on the fringes
of finance during the Fed's previous tightening cycle, from 2016
to 2019, and was barely correlated with the stock market.
Times have changed.
Bitcoin has been positively correlated with the S&P 500
index since early 2020, according to Refinitiv data,
meaning they broadly move up and down together. Their
correlation coefficient has risen to 0.41 now from 0.1 in
September, where zero means no correlation and 1 implies
perfectly synchronised movement.
By contrast, that coefficient was just 0.01 in 2017-2019,
according to an International Monetary Fund analysis published
this month.
"Now that bitcoin is not entirely held by early adopters,
it's sitting in a 60/40 type portfolio," said Ben McMillan,
chief investment officer of Arizona-based IDX Digital Assets,
referring to the institutional strategy of allocating 60% of a
portfolio to relatively risky equities and 40% towards bonds.
"It's not surprising that it's starting to trade with a lot
more sensitivity to interest rates."
Bitcoin closed below the $40,000-mark for the
first time since August 2021 on Friday, some way off its
November peak of $69,000.
HEDGE AGAINST INFLATION?
The crypto market is increasingly being characterised by big
investors, rather than the smaller retail players who drove its
early movements.
The total assets under management of institutionally focused
crypto investment products rose in 2021 from $36 billion in
January to $58 billion in December, according to data provider
CryptoCompare.
On top of this, there was bumper buying from the corporate
likes of Tesla and MicroStrategy, plus hedge
funds adding crypto to their portfolios.
"The cryptocurrency ecosystem grew from a total market
valuation of $767 billion at the start of the year to $2.22
trillion by the end of the year," CryptoCompare said.
The drift towards mainstream finance raises broader
questions in 2022 and beyond about whether bitcoin can retain
its role as a diversification play and hedge against inflation.
IMF researchers said that bitcoin's increasing correlation
with stocks limited its "perceived risk diversification benefits
and raises the risk of contagion across financial markets".
Bitcoin is also often regarded as a hedge against
inflation, mainly due to its limited supply akin to gold, the
more-established store of value in an inflationary environment.
However, its correlation with stocks has seen it become
increasingly roiled along with broader markets by the largest
annual rise in U.S. inflation in nearly four decades.
"In the current case, bitcoin is not acting as an inflation
hedge. Bitcoin is acting as a risk-proxy," said Nicholas Cawley,
strategist at DailyFX, based in London.
Jeff Dorman, CIO at digital asset management firm Arca in
Los Angeles, added: "It is also a tad ironic given that the bull
case for many digital assets in spring 2020 was expectations for
higher inflation. Now that we actually have inflation, it is
weighing on prices."
'WAITING FOR HIGHER PRICES'
Evidence of investors increasingly holding onto bitcoin for
the long-haul https://www.reuters.com/technology/bitcoin-investors-dig-long-haul-staggering-shift-2022-01-17
is growing.
Kraken Intelligence, a research blog from cryptocurrency
exchange Kraken, said that about 60% of all bitcoin in
circulation hadn't changed hands in over one year, the highest
level since December 2020.
Meanwhile funding rates for perpetual swaps across major
exchanges - indicative of sentiment among investors betting on
bitcoin's future price movements - were fairly flat, hovering
around 0.01%, as per data platform Coinglass.
Positive rates imply that traders are bullish, as they must
pay to hold a long position, while negative rates mean traders
must pay to hold a short position, or bet on the price falling.
Investors are displaying a notable unwillingness to spend
coins, according to blockchain data provider Glassnode.
"In the face of tumultuous and unconvincing price action,
this signals that this cohort of holders are patiently waiting
for higher prices to spend their respective supply," it said.
(Reporting by Lisa Pauline Mattackal and Medha Singh in
Bengaluru
Editing by Vidya Ranganathan and Pravin Char)