Saturday, December 10, 2022

Teenage bitcoin throws an interest rate tantrum

Bitcoin is maturing. This year, the original cryptocurrency turns 13 and is showing signs of maturing into a more mature financial asset – but beware of adolescent outbursts.

Bitcoin has become vulnerable to interest rates as a result of this move towards the mainstream, which was fueled by a sell-off in the currency this month as investors readied for a hawkish Federal Reserve policy meeting.

The cryptocurrency, which was launched in 2009, was still on the outside of finance during the previous Fed tightening cycle, which lasted from 2016 to 2019 and had no correlation with the stock market.

The world has changed.

According to Refinitiv statistics, bitcoin has been positively associated with the S& P 500 index (.SPX) since early 2020, meaning they move up and down in lockstep. Their correlation coefficient has increased from 0.1 in September to 0.41 currently, where zero indicates no correlation and one indicates completely synchronized 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, a 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.

 

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