\n<\/p>\n
\n Bitcoin, the original cryptocurrency, emerged\u00a0more than a decade ago out of the ashes of the global financial crisis.\n <\/p>\n
To cryptocurrency true believers, Bitcoin is\u00a0the ultimate store of value, the most solid hedge against the rampant inflation manufactured by reckless central banks and their money-printing. To skeptics, the crypto world as a whole\u00a0is a mirage whose massive run-up past $2\u00a0trillion was simply the speculative byproduct of the extraordinary amount of easy cash that\u2019s been sloshing around in the global economy \u2014\u00a0in effect, a big bubble.<\/p>\n
Both of those theories are about to face their biggest test yet.<\/p>\n
Bitcoin, the original cryptocurrency, emerged\u00a0more than a decade ago out of the ashes of the global financial crisis\u00a0as a bypass to the banks and government agencies mired in Wall Street\u2019s great calamity at the time. The digital token steadily gained a following,\u00a0inspired\u00a0a rash of wannabes and endured some wild rides. But it wasn\u2019t until the next big crisis,\u00a0Covid-19, that the market\u00a0really took off.\u00a0<\/p>\n
Crypto exploded after March 2020, when the Federal Reserve and Congress unleashed trillions of dollars\u2019\u00a0worth of stimulus to blunt the pandemic\u2019s economic blow. A bunch of\u00a0that cash made its way to digital assets,\u00a0turbocharging\u00a0prices. Bitcoin soared\u00a0305% in 2020 and\u00a0notched\u00a0another 60% the following year,\u00a0topping out at a record of almost $69,000 in early November. Since then, though, it\u2019s been on a relentless\u00a0slide,\u00a0weighed down in large part by the central bank\u2019s hawkish pivot. Now, with\u00a0odds rising that policy makers will commence a series of rate hikes as soon as March \u2014\u00a0just one of several steps they\u2019re set to take in removing liquidity \u2014\u00a0it remains to be seen if\u00a0the crypto ecosystem can hold up without it.<\/p>\n
It\u2019s not looking good so far: Bitcoin is already down some 40% from its highs, while No. 2 coin Ether and other\u00a0\u201caltcoins\u201d have also suffered steep\u00a0declines.<\/p>\n
\u201cIf they\u2019re going to hike rates three times in 2022 and keep the program, and the era of low rates is over, we\u2019re going to really see how much people believed in their Bitcoin-crypto thesis,\u201d said Stephane Ouellette, chief executive and co-founder of crypto platform FRNT Financial Inc. \u201cI would expect that the Fed getting more and more hawkish is very bad for valuations.\u201d\u00a0<\/p>\n
Michael O\u2019Rourke, chief market strategist at JonesTrading, agrees.\u00a0\u201cThe Federal Reserve\u2019s seemingly perpetual asset purchases have been the cornerstone for crypto investing,\u201d he said.\u00a0Should the central bank follow the path laid out in its latest minutes release, which showed that Fed officials are prepared to move faster than expected to lift interest rates and potentially shrink the bank\u2019s balance sheet, then \u201cthat would immediately undermine the key bullish thesis behind Bitcoin and many other cryptos,\u201d O\u2019Rourke\u00a0said.<\/p>\n
For most of its 13-year history, Bitcoin\u00a0has enjoyed an environment of easy monetary policy and zero or negative rates. While there is no straight\u00a0through-line from\u00a0the Fed\u2019s coffers to Bitcoin buy-orders on exchanges, there\u00a0is a\u00a0connection, according to David Tawil, president of ProChain Capital, a crypto hedge fund. For one, the Fed buying any type of asset can have ripple effects and lift prices of other investments. \u201cAll the buying power, all the investable power that exists has to go somewhere,\u201d he said by phone.<\/p>\n
Second, with rates at rock-bottom lows, investors have been forced to scour the market for higher-yielding opportunities and many turned to\u00a0crypto given\u00a0its ability to post outsize gains. Think of a junk-bond investor who was accustomed to high-single-digit returns even on bad days, said Tawil. \u201cHe\u2019s going to be forced to put money into something \u2018riskier,\u2019 but, more importantly, something that yields something he\u2019s used to getting.\u201d<\/p>\n
So what happens when financial conditions become tighter? \u201cThe initial move is the opposite of what happened when they put the money in \u2014\u00a0everything\u2019s going to go and swing the other way, until it settles down,\u201d Tawil\u00a0said. \u201cThat\u2019s why you have this immediate reaction in the market because everyone\u2019s anticipating that the money is going to leave the riskier stuff.\u201d<\/p>\n
The last time the U.S. central bank raised\u00a0rates was in December 2018, its final increase\u00a0in a series of hikes. Back then, Bitcoin was trading at about $3,700 and concepts such as \u201cdecentralized\u00a0finance\u201d and \u201cnon-fungible tokens\u201d were years away from entering the vernacular. It\u00a0turned out to be a\u00a0rough year for the original cryptocurrency, particularly toward the end, when\u00a0Bitcoin\u00a0lost\u00a0more than 40% during\u00a0the last\u00a0two months \u2014\u00a0a\u00a0period that also coincided with\u00a0a walloping in U.S. stocks.<\/p>\n
That dynamic is playing out again now, with Bitcoin falling in step with richly-valued equities ahead of an expected new round of Fed tightening, says Peter Boockvar, chief investment officer at Bleakley Advisory Group and editor of The Boock Report.<\/p>\n
\u201cFor now, it\u2019s proving to be just a risk-on\/risk-off asset,\u201d he said. \u201cI expect it to trade with other risk assets in response to Fed tightening.\u201d Boockvar compared the digital coin to Cathie Wood\u2019s ARK\u00a0Innovation ETF, which is seen as \u201cthe ultimate risk asset\u201d and which has also proven highly sensitive to Fed tightening as investors start to pay more attention to valuations.<\/p>\n
Bitcoin, though,\u00a0remains a supreme\u00a0shape-shifter. It has represented many things to many people for more than a decade now and its (often contradictory) narratives will continue to evolve. After all, it\u2019s been written off time and again as dead, denounced as rat\u2019s poison, and castigated as a bubble\u00a0only to come back stronger each time.<\/p>\n
And as institutional adoption increases, Bitcoin\u2019s future may also become\u00a0clearer, says Max Gokhman, chief investment officer at AlphaTrAI, which is working on an application of its artificial-intelligence\u00a0algorithms for the digital-asset space.\u00a0<\/p>\n
\u201cWe shouldn\u2019t discount that in the future Bitcoin use cases may evolve to where it reinvents itself and gains importance anew,\u201d he said.\u00a0<\/p>\n<\/p><\/div>\n
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