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, economic concerns and other things that drive the sentiment of these types of investors. The long-term thesis isn't gone though. "There are two bitcoin worlds out there," said Noelle Acheson, head of market insights at Genesis. "One dictates the market price because they're the ones active in the market. Investors not active in the market are accumulating bitcoin for a totally different reason and should not be overlooked because they're the ones lending support to the market as well as extracting bitcoin available to trade from liquid supply." Some of those same institutions are the ones holding a long-term view. Before the big tech sell-off Goldman Sachs put out a note saying bitcoin could take further market share from gold, and if it rises to more than 50% of the "store of value" market, it's price could go to $100,000. After the sell-off JPMorgan re-endorsed it as "modern store of value." "While many are buying cryptocurrencies (chasing in our opinion) because the cryptocurrencies are appreciating and/or are meaningfully outperforming other asset classes, we think the merits of bitcoin will endure near-term fluctuations in value, both in terms of digital scarcity as well as a good store of value," JPMorgan said in a note this week. Fundamentals are strong The macro environment may not be strong right now, but the fundamental variables investors use to value bitcoin are, according to Acheson. For example, about 58% of bitcoin supply has been held for more than one year, and that number has been rising steadily, according to Glassnode. Illiquid bitcoin – which is held in addresses that spend less than 25% of their incoming bitcoin – is at all-time highs. And bitcoin held by long-term holders has bounced from its mid-December lows. "We are seeing evidence of continued accumulation by these longer-term investors who understand that bitcoin is not just a risk asset," Acheson said. "It's also a longer-term play that represents whatever particular view investors may have of the overall fiat system, inflation or any other macro theses and macro hedges they may wish to employ." That bitcoin is still 13 years young and its thesis and use cases are still evolving underscores what Acheson said is one of bitcoin's most salient qualities. "There is no one narrative that can be disproven or debunked," she said. "Bitcoin is what you want it to be – if you're a short term investor, it's a risk, and if you're a longer-term investor then it's something totally different."

In this photo illustration, a visual representation of the digital Cryptocurrency, Bitcoin is on display in front of the Bitcoin course's graph on February 09, 2021 in Paris, France.

Chesnot | Getty Images

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.