Bank of America experts explain why Bitcoin is a risky asset rather than a hedge against inflation
Bitcoin is often described as a “safe haven” for investment and a hedge against inflation. That’s usually a characteristic that cryptocurrency enthusiasts and some analysts themselves give to the coin. Unfortunately, they hardly have anything to do with reality, according to Bank of America (BoA). According to their latest report, cryptocurrencies had reached a very high correlation with the S&P 500 stock index by the end of last year, meaning that any crisis in the global economy is now bound to have a negative impact on Bitcoin. Accordingly, in this environment at least, the coin does not appear to be a lifeline for a period of possible global deterioration. We will discuss the experts’ conclusions in more detail.
It should be noted that Bank of America representatives often comment on what is happening in the blockchain industry. For example, in January they told which cryptocurrency would be Visa's counterpart in the digital asset industry. At that time they thought that Solana, which is notable for its high speed and low fees, would be worthy of such a title. Read more about the experts' study in a separate article.
What will happen to Bitcoin in the future
In a report titled Global Cryptocurrencies and Digital Assets, Bank of America experts stated that Bitcoin has been a risky asset since at least July last year. As a reminder, it was this month that the cryptocurrency started showing the first signs of growth after the market collapsed in May amid a ban on BTC mining in China.
Here’s a rejoinder from experts sharing their view of the situation.
On January 31, the correlation between Bitcoin and the S&P 500 (SPX) as well as between Bitcoin and the Nasdaq 100 (QQQ) reached an all-time high of 99.73 percentile.
Correlation between Bitcoin, gold and the S&P 500
As a reminder, high-risk assets are defined as investments that are subject to high volatility. That is, their price changes rapidly in a short period of time. Shares, real estate and currencies fall into this category.
Most interestingly, during the aforementioned time period last year, Bitcoin showed almost zero correlation with the price of gold, meaning it did not move in the same direction as gold. According to Decrypt’s sources, the cryptocurrency is often referred to as “digital gold” and is compared to the precious metal for their properties. As you can see, in this bull run, BTC has certainly shown little in common with gold, if you consider only the cryptocurrency’s market dynamics.
Bitcoin price this week
So why has Bitcoin gained the status of “inflation-proof” among many crypto-enthusiasts at all? The thing is that the maximum number of BTC coins is limited to 21 million units. At the same time, bitcoin issuance is predictable and regulated by clear rules, established by the creator of the cryptocurrency Satoshi Nakamoto. Traditional national currencies, on the other hand, are not constrained in this sense, which is why their constant printing tends to lead to high inflation in the economy.
The latter was especially true after the outbreak of the COVID-19 pandemic. In order to compensate for the losses in the economy caused by widespread quarantine, the US government began actively printing dollars. This led to a “bloat” in the stock market and the crypto market respectively, as well as record levels of inflation in the US economy. The US Federal Reserve is now phasing out the stimulus to keep inflation from spiralling out of control.
Free money in the USA
Nevertheless, the US is not the whole world, and Bitcoin can still be considered a great investment for times of crisis in other countries. For example, where the local economy is in worse shape than that of the United States. BoA experts cited Turkey as an example of such a country. There, due to the economic crisis last year, the Turkish lira lost a lot in value against the US dollar, while the BTC price in the Turkish lira rose to its all-time high. In such a situation, buying bitcoins versus investing in the local currency would really help the investor to keep their money.
We believe that Bitcoin's current correlation with the traditional world of finance really does not look good. However, things are changing very fast in the cryptocurrency industry, so it is possible that after a few months the trend will be completely opposite. Whatever the case may be, crypto has a huge potential for development, so it would be quite strange to get stuck with it solely because of its connection to other assets.
What do you think about it? Share your opinion in our Millionaire Crypto Chat. There we will discuss other details related to the world of decentralized finance.
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