Big investors bought up bitcoin as hoped and in the process ruined its usefulness as a hedge

Published Fri, Jan 28 20222:22 PM ESTUpdated Fri, Jan 28 20224:40 PM EST

Bitcoin suffered alongside stocks as investors fled risk assets in January, raising questions about the cryptocurrency's efficacy as a hedge. Bitcoin is no stranger to price plunges, but the most recent bout of turbulence is different because for the first time it was largely driven by macro catalysts outside of the crypto market itself. "The latest cryptocurrency drawdown highlights that mainstream adoption can be a double-edged sword: While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class," Goldman Sachs strategists Zach Pandl and Isabella Rosenberg said in a note this week. Bitcoin's recent steep decline began at the start of month when the Federal Reserve announced plans to remove liquidity from the market, causing a shift in macro sentiment and big sell-off of risky assets. It continued to mirror the roller-coaster ride in the stock market this week. "Prior to the pandemic, bitcoin and other digital assets showed low correlations to traditional financial market variables — in effect, crypto behaved as an entirely different ecosystem," Goldman's analysts said. "But over the last two years, as bitcoin has seen wider mainstream adoption, its correlation with macro assets has picked up." A notable change in behavior Bitcoin last traded more than 2% higher at about $36,890. If it closes above $37,400, for the second Friday since it dipped below $40,000, the bearishness of the past couple of weeks could be considered a false breakdown, according to Katie Stockton of Fairlead Strategies. She previously told CNBC the "emotionally charged downdraft" could be a shakeout, but she wouldn't take a bearish long-term stance on the cryptocurrency before seeing two confirmed closes below that level. Bitcoin is still so nascent that it isn't clear if this behavioral change is temporary or a new normal. There's more institutional interest in it than ever before, which is exactly what some early "believers" felt would bring bitcoin to the mainstream and give it more legitimacy. As a result, it's behaving like the other risk assets that institutions trade. Goldman Sachs says this trend is likely to continue. "Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets," the analysts said. "But these assets will not be immune to macroeconomic forces, including central bank monetary tightening." A changing position in the portfolio For short-term traders, the idea of bitcoin as a hedge may be long gone, but there are still long-term holders in the market who either believe in its use as a safe-haven asset or value it as something completely different altogether. The number of long-term holders of the cryptocurrency is still rising, according to Glassnode. The firm studied the supply of bitcoin that's been held for more than a year, and the number of wallet addresses that spend less than 25% of their incoming bitcoin is at an all-time high. "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."

Artur Widak | NurPhoto | Getty Images

Bitcoin suffered alongside stocks as investors fled risk assets in January, raising questions about the cryptocurrency's efficacy as a hedge.

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Big investors bought up bitcoin as hoped and in the process ruined its usefulness as a hedge

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