Even bitcoin can’t escape Omicron. The digital currency plunged over the weekend, tumbling by more than a fifth to hit $41,967. Bitcoin reached an all-time high of $68,521 last month but has since lost momentum. Despite the latest pullback the digital currency is still up 75% since the start of the year.
The “gut-wrenching fall” will have left “even some veteran crypto bulls feeling a touch queasy”, says Mark DeCambre on MarketWatch. Crypto’s fans argue that digital assets aren’t correlated with the prices of other assets such as stocks and bonds, providing invaluable portfolio diversification. The trouble is that “crypto has been trading more in step” with equity and bond markets recently, with the weekend plunge following a sell-off on the S&P 500.
The past couple of weeks have shown that bitcoin is not a safe-haven when equity markets plunge, says Ipek Ozkardeskaya of Swissquote, an investment platform. “Bitcoin is a very high-risk asset, and it is not a proven hedge against inflation.” The case for crypto being an inflation hedge looks “flimsy” given the asset’s “huge volatility”, say Simon Duke and Ben Martin in The Times. Cryptocurrencies cannot be “stable stores of value when they have become a magnet for financial speculators.” The latest sell-off was compounded by leverage: some traders speculate on cryptocurrency with “as little as 5% of the size of their investment upfront”. Falls in bitcoin can then force exchanges to sell clients’ positions, fuelling price falls.
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Bitcoin’s growing popularity with Wall Street is part of the problem: the stockmarket’s recent falls may have forced hedge funds to sell their bitcoin holdings to raise cash. As a “growing army of institutional investors” move into crypto, bitcoin’s correlation with stocks will only increase.
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