Bitcoin (BTC-USD) was grouped with other speculative investments during the Federal Reserve’s last tightening cycle, falling on expectations that rising interest rates would dampen risk appetite. Now, with renewed optimism that borrowing costs could soon fall, the biggest cryptocurrency supporters argue it is closer to high-growth assets such as stocks of technology companies.
The token has been trading like that lately. The 90-day correlation coefficient of the Nasdaq 100 index, centered on digital currency and technology stocks, reached 0.46 this week, the highest since the end of August. A coefficient of 1 indicates that the asset is moving stationary, while a coefficient of minus 1 indicates that the asset is moving in the opposite direction. After the Federal Reserve began raising its target interest rate for interbank overnight lending in early 2022, the correlation soared above 0.8, the highest since digital assets entered the mainstream consciousness.
Joshua Lim, co-founder of trading firm Arbelos Markets, said individuals are turning to cryptocurrencies as growth assets or assets that embody network value. He explained that its capabilities as a technology and as a means of transferring value mean it will show a stronger correlation with other assets characterized by growth, such as the Nasdaq and technology stocks.
Bitcoin proponents have consistently promoted the coin as an uncorrelated asset, free from government influence and resistant to external pressure or influence. Introduced to the public in 2008 by an individual or group known as Satoshi Nakamoto, Bitcoin was designed to establish a decentralized currency independent of government and central bank control. In its evolution, it has become known as a digital asset equivalent to gold, an inflation hedge, and a store of value. However, Bitcoin’s price volatility has undermined some of these stories. The token was opened up to a new class of investors earlier this year when U.S. exchange-traded funds were approved to hold Bitcoin directly.
CEO Lim emphasized that various factors, including the introduction of U.S. ETFs, Bitcoin’s record surge in March, and the blockchain halving in April, have become important incentives for traditional investors to pay attention to the cryptocurrency asset class and begin investing. However, in the past, these catalysts have shifted attention to the broader macroeconomic environment.
Bitcoin soared after the ETF launched in January, reaching nearly $74,000 in March, before paring gains as demand for the investment vehicle began to cool. The token rose about 1.4% on Friday to around $66,200 and is up nearly 10% this week. Bitcoin is up about 58% this year compared to an 11% rise for the Nasdaq 100 index.
CEO Lim emphasized that various factors, including the introduction of U.S. ETFs, Bitcoin’s record surge in March, and the blockchain halving in April, have become important incentives for traditional investors to pay attention to the cryptocurrency asset class and begin investing. However, in the past, these catalysts have shifted attention to the broader macroeconomic environment.
Data released Wednesday showed U.S. underlying inflation eased in April, falling for the first time in six months. These developments are consistent with where Federal Reserve officials want to go before considering interest rate cuts. In particular, the core consumer price index, which excludes highly volatile food and energy costs, exceeded expectations for three consecutive months and rose 0.3% from March.
Still, several Federal Reserve officials emphasized Thursday the importance of keeping borrowing costs high for an extended period of time while waiting for further evidence of inflation easing. This means that there is no intention to hastily reduce interest rates.
Researcher Lim expressed the view that if the Federal Reserve cuts interest rates, it will generally have a positive effect on risky assets. They added that such a scenario would also be advantageous for cryptocurrencies.
Despite increased interest in the Federal Reserve among cryptocurrency investors, Bitcoin has shown consistent growth and resilience since the launch of the U.S. ETF, according to Winterflood, CCData said.
Winterflood said it will be interesting to watch the results if the Fed actually cuts interest rates in the coming months. They pondered whether Bitcoin could replicate its past behavior of being perceived as a riskier asset, or whether it would simply transition into an alternative asset that would be accepted by existing markets.
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