Bitcoin Acts Less Like Digital Gold and More Like a Risky Stock
Wall Street is all about diversification when promoting crypto. Bitcoin’s embarrassing problem is that it can get caught up in the selloff when markets are down.
Bitcoin fell as high as 11% Monday, as stock markets panicked in the wake a possible default by China Evergrande Group. Correlation analysis has shown that Bitcoin and U.S stocks are moving in lockstep with the link between them at their strongest point in a year.
One reason is that Bitcoin is still a volatile investment. Investors start to de-risk their portfolios by dumping it.
Vijay Ayyar is the head of Asia Pacific at crypto exchange Luno in Singapore. He said that Bitcoin and stocks are closer linked because of the current news environment. He said that there is a little uncertainty in the markets due to the Fed taper talks and meeting.
Analysts have also stated that Bitcoin will likely mirror risk-on or risk-off moves, as professionals can access crypto via futures markets and exchange-traded funds. Bitcoin lost 6% in two days when the S&P 500 fell more than 2% over the course of July.
Academic research has confirmed that Bitcoin can be used to diversify portfolios. An study by the University of Bath showed that some exposure to cryptocurrency can have benefits for portfolio diversification.
Others argue that volatility is due to the asset’s newness. Bitcoin will gain widespread acceptance and eventually, more institutional cash. This will stabilize the prices and make it more like an alternative hedge.
The moves still speak to a long-running discussion about the investment rationale behind crypto. It is a risk asset, a safe haven, an inflation hedge or a symbol of speculative excess.
Despite all the market volatility, the view that Bitcoin could be another option to cash and gold still holds great sway. Ray Dalio , a billionaire, stated last week to CNBC, that he has some Bitcoin and said it’s worth considering other options to cash.