This article was contributed to us by Sherry Goh,Global Expansion Manager and Country Manager for Singapore, Luno.
Despite many acknowledging Bitcoin as a form of “digital gold”, the recent fall of Bitcoin’s price to below US$20,000 in tandem with the wider market downturn may have proven otherwise.
The volatility of cryptocurrency is something that investors have come to expect, but that has recently intensified further due to its globalised and decentralised nature – affecting the attitudes of investors and as a result the price of Bitcoin. I do have another perspective to share on the current cryptocurrency environment, but let’s first take a deeper look at the facts.
Various Factors Suppressing Bitcoin’s Price
This is largely due to a combination of idiosyncratic crypto-related uncertainties resulting from the de-pegging of TerraUSD(UST) and its interconnectivity to many other big names – crypto-lending platform Celsius Network halting withdrawals & Singapore-based cryptocurrency hedge-fund Three Arrows Capital filing for bankruptcy.
On a macro level, surging inflation, supply chain implications, the ongoing geopolitical crisis that is the conflict between Russia and Ukraine, and the Fed’s tighter monetary policy – all having an impact on not just the cryptocurrency markets, but also the wider markets. The Nasdaq is down more than 25% in 2022 and in a bear market. The S&P 500 has also officially entered the bear market mid-june, as reported by CNBC.
During the Federal Open Market Committee (FOMC) meeting on 4 May, the Fed’s Chairman Jerome Powell announced that the US central bank was raising interest rates by 50bps for the first time in 22 years, as well as the balance sheet runoff that will begin in June. In June, interest rates were further raised by 75bps, the biggest hike seen since 1994. Following both events, the price of Bitcoin increased for a couple of hours in hopes of a relief rally, before falling right back down again.
These rate hikes are in hopes of taming the surging inflation in the US which has grown from 5.4% in September 2021 to 8.6% peak in June 2022, as shared by the US Labor Department’s Consumer Price Index (CPI) report. The report was closely followed by Bitcoin investors, as the coin is also seen as a hedge against inflation and currency devaluation.
The cryptocurrency market has been observed to lately be tracking the stock market. Bitcoin currently has the largest correlations with the S&P 500 and NASDAQ, at 0.88% and 0.91% respectively with a correlation of 1% – this means they move in tandem with each other. In other words, when the stock market is affected by global macroeconomic events, the probability of Bitcoin prices being affected as well would be high. In this perspective, it does challenge the commonly-acknowledged position of Bitcoin as the “Digital Gold”. However, bear in mind that gold and precious metals have not been having a great run either. Silver is near its 2-year low, and gold touched its 5-month low in July 2022.
Bitcoin Is Still In Its Infancy (And Investors Need To Understand The Risks When Investing)
If anything, I would like to stand by the view that cryptocurrency is still in its infancy with much growth potential. Bitcoin has proven its upside in the last decade – outperforming both S&P500 & Gold for the third consecutive year in 2021 – and garnered much attention to its potential as a diversification asset, especially after hitting its all-time high at US$69,000 last November.
It is also worth noting that the price of Bitcoin being affected by global economic and political uncertainty should serve as a reminder of the risk and volatility that comes with cryptocurrency investments, and with any other investment medium. Put simply, in times of economic prosperity, investors will be more willing to invest as they have higher spending power, leading to an increase in demand, decrease in supply and increase in price. On the flipside, in times of uncertainty, take for example right now with the recession and inflation looming, they will be more risk averse with investments, leading to a drop in prices due to a decrease in demand and increase in supply.
It also reminds investors of the need to stay up-to-date with the latest market happenings and the effects it will have on both the cryptocurrency and stock market. At Luno, helping our customers remain as informed as possible is an ongoing focus of ours, as it is essential for everyone to understand all the basics before making an informed decision, especially beginners in the space. To know all the ins and outs of cryptocurrency, opt to receive daily briefings and market developments on Luno Singapore’s Telegram Channel, Luno Discover, or LunoTV, our official YouTube channel.
I hope these have widened your perspectives for strategising your future investments and as always, please DYOR – Do Your Own Research!