Whenever traditionally minded investors think their head is wrapped around the role of cryptocurrencies in financial markets, the digital asset class always proves them wrong.
The ink had barely dried on the analysis that bitcoin and stocks were moving in the same direction (downward) in September, when that positive correlation quickly reversed this month. As it stands now, the S&P 500 is down nearly five percent from its previous record on Sept. 2, while the largest cryptocurrency is up 10 percent.
The dissolution of bitcoin and stocks could revive one of the cryptocurrencies’ long-standing promises made by their proponents – that they can serve as a hedge to protect investment portfolios when equities time or Sold during the turmoil. It is a function that is now in high demand, with many worrying that Treasuries may not be relied upon to play that role during periods of ultra-low yields and rapid inflation.
Nevertheless, the highly speculative nature and often-unexplainable volatility of crypto leave many reluctant to attempt to pigeonhole it into credible relationships with traditional assets.
For Stephen Ouellet, chief executive officer of crypto-focused platform FRNT Financial Inc., it’s a matter of identifying which type of “trading window” dominates sentiment. These can be rapidly moving targets.
“Sometimes you can say it is related to more speculative equities such as technology, other times a store-of-value-type mentality takes over and it is related to gold; the space in major liquidations is usually riskier assets. “While these relationships for periods are relatively consistent, they change at a moment’s notice. And that seems to have happened here. ”
Now that it’s separated from equities, he said, “we appear to be back in some kind of inflation-hedged, hard-asset-correlated window.”
This is in line with the thinking of strategists at JPMorgan Chase & Co, including Nikolaos Panigirtzoglu, who speculated in a note on Wednesday that institutional investors may return to bitcoin, perhaps considering it as a better inflation hedge than gold. I see.
Platinum – a traditional inflation hedge – has been the most tightly linked macro asset to bitcoin among those tracked by Bloomberg, with a correlation coefficient of 0.76 over the past 10 trading sessions. (Coefficient of 1 means assets are moving in lockstep, while minus -1 would show they are moving in opposite directions.)
However, the trading nature of crypto, and the transfer narratives employed to explain its performance, increase the risk that investors may be fooled by the randomness.
According to Brian Mosoff, CEO of Toronto-based investment firm Ether Capital Corp, it is probably too early to achieve a seamless connecting dots between crypto and traditional asset classes. He still sees crypto as a riskier asset like stocks because investors who have bought in the past year or so “don’t yet have full confidence that the asset class is here to stay.”
Ultimately, however, Mossoff sees the promise of crypto at play as an uncorrelated asset and as such, a useful hedge. It’s plausible that bitcoin’s latest phase of highs is part of the way, as uncertainty builds around the lack of the US debt ceiling and the impact of Federal Reserve policy. While politicians can push the government to the brink of default on its loans, and central bankers can increase or decrease the amount of money, the supply of bitcoin is limited and predictable because it is all written in its software code.
“This is a moment when New World steps in and says these are the core functions and core value proposition for the design of this asset class,” he said. “Investors are slowly saying that maybe this is not such a crazy idea and that is why capital is entering this space,” he said.
Of course, there are potential reasons for crypto’s recent bust and boom that have nothing to do with the theoretical or actual role it plays in an investment portfolio. China’s latest crackdown on cryptocurrency trading, which led to a sell-off last month, has been overshadowed by more bullish news: a Bank of America in-depth research report found the asset class too large for investors to ignore, US Bancorp launches custody services for institutional investors, and reports that Brazil is considering legislation making bitcoin legal tender (the reality is there is a proposal to regulate the cryptocurrency).
On top of this, as CoinDesk reported, there have been some favorable comments on crypto from US lawmakers, and there are signs of big-money investors, or “whales,” making big purchases.
There’s also another obvious reason why bitcoin could be dethroning equities this month: it’s pumping like crazy. The phrase “uptuber” has quickly spread among true believers on social media as they rally for profits in October.
For Steve Sosnick, chief strategist at Interactive Brokers, the latest surge is reminiscent of the speculative frenzy surrounding meme stocks like Gamestop Corp. and AMC Entertainment Holdings Inc. that was fueled by aggressive social-media campaigns.
“I think they are attracted to the same pool of investors, if not the same pool,” he said. “And I think the mindset behind the business may be similar.”
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)