After the post-FED meeting announcement, Bitcoin rose sharply to test the $40,000 resistance. However, market sentiment seems to have changed today as it fell back below $37,000. Wild swings in the crypto market are common, but the difference is that now they seem to follow Wall Street as opposed to on-chain data or crypto related news.
Bitcoin follows Wall Street
Yields on 30-year Treasuries rose around 3% to their highest level since 2018. The move sent the Nasdaq plummeting 4% within hours, and Bitcoin followed suit, dropping 7% over a similar period.
The decline follows a growing trend that indicates the crypto market is acting more like a tech venture than an entirely separate asset class. The May 5 FED meeting confirmed a 50 basis point rate hike to fight inflation. The stock market reacted positively as Jerome Powell apparently pulled 75 basis points off the table. The argument that this could be bullish for Bitcoin centers on the fact that Bitcoin has the highest LTV ratio in its history.
This means more investors are using credit to invest in Bitcoin. A lower-than-expected rate increase could suggest that interest on loans will not rise beyond manageable limits. However, any rate increases are made to combat inflation, which Powell said was “far too high”. If Bitcoin is an inflation hedge, why did it react positively to the announcement of an inflation plan?
Is Bitcoin still an inflation hedge?
Bitcoin is considered an inflation hedge against traditional assets. Cathie Wood of Ark Invest recently said:
“If inflation is an issue, Bitcoin is a great inflation hedge…it’s a hedge against counterparty risk.”
However, this argument may become harder to follow given that Bitcoin has reacted even more aggressively than Wall Street to fears that the FED may not be able to rein in inflation. Analysts are beginning to question the Fed’s strategy and their ability to control inflation. It makes sense to assume that you don’t have to follow the same trend for an asset class to be a hedge against something. If Bitcoin falls as inflation rises, it is no longer a hedge.
However, Microstrategy CEO Michael Saylor recently told Bloomberg.
“That’s the whole schedule. If you go back two years to when Microstrategy bought, it’s up 400%… If you look at it days, weeks, or months from now, traders are controlling it.
He seems to view even Bitcoin’s monthly price action as being controlled by traders. Indeed, Bitcoin has grown by 400% since 2020, but it is also true that billions of additional institutional dollars are now involved in crypto.
While many see the increase in investment from traditional companies as a bullish signal for Bitcoin, it may also have had the negative effect of correlating it more closely with traditional assets, at least in the short term. Even the announcement another $1.5 billion worth of Bitcoin purchases from LFG did little to stop Bitcoin from following Wall Street down.
A recent report from Coinbase Institutional showed that Ethereum is more closely correlated to the S&P500 than Bitcoin. Is the future of Bitcoin and crypto markets in general doomed to follow traditional assets, or can it decouple from day-to-day swings ahead of Bitcoin’s 2024 halving?
In the past 40 days, $ETH had a higher correlation with the S&P500 than with $BTC 📈
Some crazy stats from the latest Coinbase Institutional Report… pic.twitter.com/twUPfbqBdu
— Coin Bureau (guy.eth) (@coinbureau) May 3, 2022
