Does mainstream crypto-adoption lead to underperformance in crises?
Thanks to its growing popularity among all demographics, major financial institutions are jumping on-board to research and analyze the emerging asset class of cryptocurrencies. J.P Morgan is one such institution, with its latest Cross-Asset Strategy report observing that the mainstream adoption of cryptocurrencies leads to underperformance during crises.
According to its analysis, over shorter intra-month and intra-quarter horizons, crypto-assets rank as the poorest hedge for major drawdowns in Global Equities, particularly relative to fiat currencies like the U.S dollar, which they seek to displace. Reportedly, this comes down to the fact that the mainstreaming of crypto-ownership is raising correlations with cyclical assets which potentially converts them from insurance to leverage.
Interestingly, Bitcoin and the S&P 500 have a 180-day correlation of 0.23, according to data from CoinMetrics, a figure that represents a relatively weak relationship, despite the figure being stronger than it was a year ago.
It should be noted, however, that J.P Morgan’s analysts did point out that “a more unique macro shock” related to much higher U.S inflation or a breakdown in the payments system will alter this pattern. Indeed, rising fears of inflation amidst increased Quantitative Easing policies in the U.S. Between March and November come into play here, with the measure of broad-based money supply, M2, jumping by a sharp 24 percent.
Regardless of its seemingly higher correlation with equities, this may further drive the store of value narrative for Bitcoin as an inflation hedge.
Bitcoin has retraced by over 17% over the past week, trading at around $31,700, at the time of writing, after touching an all-time high of $42,000 earlier this month.
For a lot of Bitcoin proponents, mainstream adoption is less of an issue than incoming Treasury Secretary nominee Janet Yellen’s remarks on the “need to regulate crypto” over concerns that it is used for illicit activities.
In fact, soon after these remarks were made, many in the crypto-community voiced their disapproval. Tyler Winklevoss, popular Bitcoin proponent and Founder of crypto-exchange Gemini was one of them, with Winklevoss going on record to state,
“This is completely false. Bitcoin is mainly used by citizens to protect themselves against the incompetence and gross negligence of central bankers.”