With rising rates and inflation, investors are split on how to value bitcoin. Here’s why

Published Sun, Jan 16 20229:09 AM EST

Bitcoin bulls have long believed that the cryptocurrency's best use is as a hedge against inflation or a safe-haven asset in times of uncertainty. In recent months, however, moves in bitcoin's chart have been more in tune with the ups and downs of stocks than gold. And when this year kicked off with news the Federal Reserve plans to remove liquidity from the market, causing a shift in macro sentiment and big sell-off of risky assets, bitcoin fell to its lowest point since September. "Since the Fed began their historic pandemic era monetary policy, both equities and cryptocurrencies have soared to all time highs," said Clara Medalie, research director at crypto data provider Kaiko. "It makes sense that once the liquidity taps have turned off, the two asset classes will respond similarly. While the 'crypto as safe haven' narrative remains popular, what we are actually seeing in the data is that the asset class behaves more like a risk asset that is highly responsive to global shifts in financial policy." This year kicked off with a spike in the 10-year U.S. Treasury yield and the Federal Reserve looking at at least three rate hikes this year to fight inflation, which has risen 7% in the past year . The combination could mean bitcoin, along with other risky assets, are in for some choppy times, with the events of January being just the start. Bitcoin's correlation with equities reached its highest level in 17 months, according Kaiko. At the same time, it's also become more detached from other crypto assets, like NFTs, platform tokens rivaling Ethereum and decentralized finance tokens. Bitcoin dominance (or market share) began 2021 at about 70% and fell to about 40% by the end of the year, according to a report by Kraken, published Thursday. "Bitcoin has evolved into something that is much bigger than just digital assets," said Jeff Droman, chief investment officer at Arca. "Bitcoin's correlation to the S & P, the Nasdaq and to things like the KWEB Chinese technology index and the ARK Innovation ETF – bitcoin's correlation has been rising over the last 18 to 24 months to those types of assets, while declining versus other digital assets." What changed Investors who see bitcoin as an alternative system or a revolutionary technology, as opposed to a risk asset, may now be required to try and anticipate what sways those who move the price – if they're focused on returns. In 2021, bitcoin became an institutional asset as big investors, short term traders and macro funds jumped into it. Now, bitcoin's moves are dictated more by political issues, econo