While Bitcoiners often advertize the cryptocurrency as an anti-inflationary “digital gold,” Bank of America says it trades like nothing of the sort.
A recent company report indicates that the crypto asset moves far more similarly to risk assets such as equities, and reached all-time high correlations with the S&P 500 by the end of January.
Tight correlation to risk assets
According to the research note—titled “Global Cryptocurrencies and Digital Assets”—Bitcoin has been trading as a risk asset since July of last year. This was about the same time that BTC’s price showed signs of meaningful recovery following a 50% price crash in May 2021.
Risk assets are typified by high volatility. Equities, real estate and currencies all fall into this category.
“Correlations on Jan 31 between bitcoin and the S&P 500 (SPX) and between bitcoin and the Nasdaq 100 (QQQ) reached all-time highs and the 99.73 percentile respectively,” reads the report. Meanwhile, the asset has maintained near-zero correlation with gold during that time. Bitcoin is often compared with gold as an inflation hedge asset (though gold itself doesn't always act as such).
Unlike some other cryptocurrencies such as Ethereum, Bitcoin has a fixed supply issuance schedule. The cryptocurrency will be mined ever more slowly across time until it reaches a cap of 21 million coins. This has spurred some investors to use it as a hedge against rampant currency devaluation, oftentimes in preference over gold.
Bitcoin-to-gold correlation was stronger early in the pandemic, following promises of intensive stimulus from world governments in March 2020. Nevertheless, BofA now believes that Bitcoin will neither be adopted as an inflation hedge in developed countries nor lose its status as a risk asset until its price volatility goes down.
Bitcoin, inflation, and the Fed
While Bitcoin’s correlation to risk assets is strong, it has a small propensity to react to Federal Reserve policy and inflation statistics, though in unpredictable ways. In November, Bitcoin’s price rose to an all-time high around $69,000 shortly after October’s inflation figures were revealed at 6.2%—a 30-year high at the time. However, Bitcoin and stocks fell later that month once the Fed chairman deemed inflation as no longer a “transitory” phenomenon.
Nevertheless, the report did acknowledge that Bitcoin could function as a reliable inflation hedge in underdeveloped countries with more inflationary environments. This is on display in Turkey, where Bitcoin was trading at all-time highs denominated in Turkish lira this December, despite trading lower against the dollar.