For true believers in cryptocurrency, bitcoin is the ultimate store of value, the most solid hedge against rampant inflation made by reckless central banks and money printing. To skeptics, the crypto world as a whole is a mirage whose massive surplus of more than $2 trillion was just a speculative byproduct of the extraordinary amount of easy cash that was flowing into the global economy – in fact, a huge bubble.
Both of these theories are about to face their biggest test yet.
Bitcoin, the original cryptocurrency, emerged more than a decade ago from the ashes of the global financial crisis as a sideline for banks and government agencies mired in the great Wall Street disaster at the time. The digital icon has steadily gained a following, inspired a string of wannabes and endured some road trips. But the market didn’t really take off until after the next big crisis, Covid-19.
Cryptocurrency exploded after March 2020, when the Federal Reserve and Congress launched trillions of dollars in stimulus to cushion the economic blow of the pandemic. A batch of that money made its way into digital assets, driving up prices. Bitcoin surged 305 percent in 2020 and made another 60 percent the following year, topping a record high of nearly $69,000 in early November. Since then, though, it has been on a relentless slide, largely saddled with a hawkish central bank pivot. Now, with the odds rising that policy makers will begin a series of price increases as soon as March – just one of several steps they intend to take to remove liquidity – it remains to be seen whether the crypto ecosystem can survive without it.
It doesn’t look good just yet: Bitcoin has already fallen about 40 percent from its highs, while second coin Ether and other “digital currencies” have suffered sharp declines.
“If they are going to raise rates three times in 2022 and maintain the program, and the era of low rates ends, we will really see how confident people are in their Bitcoin crypto thesis,” said Stefan Owlett. CEO and Co-Founder of Crypto Platform FRNT Financial Inc.
Mr. Powell had more fun with the money printer. https://t.co/RvCFklgvep
– Garrett N. Deal Crush (JaretTurkell) 1641470465000
Michael O’Rourke, chief market strategist at JonesTrading, agrees. “Permanent asset purchases by the Federal Reserve have been the cornerstone of investing in digital currencies,” he said. If the central bank follows the path outlined in its latest issue of minutes, which showed that Fed officials are prepared to move faster than expected to raise interest rates and possibly shrink the bank’s balance sheet, that would immediately undermine the main bullish idea behind Bitcoin and many other businesses, O’Rourke said. other cryptocurrencies.
For most of its 13-year history, Bitcoin has enjoyed an environment of easy monetary policy and zero or negative rates. Although there is no direct line from Federal Reserve coffers to bitcoin purchase orders on exchanges, there is a connection, according to David Long, president of ProChain Capital, a cryptocurrency hedge fund. First, the Fed’s purchase of any type of asset can have multiplier effects and raise the prices of other investments. “All the purchasing power, all the investable power that is out there has to go somewhere,” he said by phone.
Secondly, with prices dropping to their lowest levels, investors have been forced to search the market for opportunities with higher returns and many have turned to cryptocurrencies due to their ability to spread huge gains. Think of a junk bond investor who’s used to high single-digit returns even on bad days, Long said. “He’ll have to invest the money in something ‘riskier’, but more importantly, something that will result in something he used to get.”
So what happens when financial conditions get tighter? “The initial step is the opposite of what happened when they put the money in – everything will go and swing the other way, until it stabilizes,” Tawil said. “That’s why you have the immediate reaction in the market because everyone expects the money to leave the more dangerous stuff.”
The last time the US central bank raised interest rates was in December 2018, the final increase was in a series of increases. At the time, Bitcoin was trading at around $3,700, and concepts like “decentralized finance” and “non-fungible tokens” were years away from entering the vernacular. It’s been a rough year for the original cryptocurrency, especially towards the end, when Bitcoin has lost more than 40 percent in the past two months — a period that also coincided with a fluctuation in US stocks.
That dynamic is now showing up again, with bitcoin pulling back along with higher-value stocks ahead of an expected new round of Fed tightening, says Peter Boockvar, chief investment officer at Bleakley Advisory Group and editor of The Boock Report.
“At the moment, it’s proving to be just a very risky and risk-averse asset,” he said. “I expect it to be traded with other risk assets in response to the Fed’s tightening.” Boockvar compared the cryptocurrency to Cathie Wood’s ARK Innovation ETF, which is seen as an “ultimate risk asset” and has also proven extremely sensitive to Fed tightening as investors begin to pay more attention to valuations.
Despite this, bitcoin is still the ultimate shapeshifter. It has represented many things to many people for over a decade now and its (often contradictory) narratives will continue to evolve. After all, it has been repeatedly written off as dead, denounced as rat poison, and criticized as a bubble only to come back stronger each time.
And with increased institutional adoption, the future of Bitcoin may become more clear, says Max Gokhman, chief investment officer at AlphaTrAI, which is applying its own AI algorithms to the digital asset space.
“It should not be ruled out that future use cases for bitcoin may evolve to where they reinvent themselves and gain relevance,” he said.