Nothing is surprising about scale of Bitcoin’s fall (from a Bitcoin bull)
- Dan Ashmore is a long-term Bitcoin bull but says its volatility and stock market correlation remains high
- Stock market has had its worst half-year in over half a century
- Talk of a Bitcoin decoupling was bull market hysteria and requires only simple math to disprove
Let’s regather for a second and count the bearish happenings in the market right now:
- Inflation is exploding to such a degree that the 4th of July fireworks this weekend are likely to pale in comparison
- At the same time that inflation is exploding, the Fed is raising rates (and then backtracking…and then re-affirming the raise)
- There is a war occurring in Europe
- Employment in Germany, the best economy in Europe, has risen to 5.3%, as of this morning’s report
So, yeah… the macro climate is wretched right now. All of this has combined to form the worst half to a year in the stock market in over half a century.
Against this backdrop, therefore, it is not surprising that Bitcoin has struggled so greatly. If someone had told you on New Year’s Eve that the Nasdaq would be down 29% at the halfway mark of 2022, without knowing anything about anything else, what would you have predicted Bitcoin to be?
The answer, as I type this, is a pullback of 59%. Regarding Bitcoin itself, I’m not sure this has told us anything we didn’t already know. Sure, it proved the megabulls wrong with all their talk of supercycles and inflation hedges and any other hopium they spread around online echo chambers.
VolatilityCopy link to section
The reality is sometimes simple and does not need to be overcomplicated. Pull out the simplest numbers of all and just ask yourself, what does this mean? Take the following:
Bitcoin has historically been a high volatility asset. I plotted the standard deviation of daily returns for each of the four years prior to 2022 and benchmarked them to the same metric but for Nasdaq daily returns.
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The above result shows that Bitcoin’s volatility has been substantially more than Nasdaq’s every year, so why did anyone expect 2022 to be different? Even as Bitcoin rose in price and adoption ramped up throughout 2021, talks of a decoupling were premature given that the Nasdaq was also heading vertical. Indeed, every risk asset was doing the same as the Fed kept the money printer on and the COVID boom rocked assets upwards.
Can Bitcoin be an inflation hedge?Copy link to section
To be clear, I am a massive Bitcoin believer and am very bullish on its long-term prospects. However, anyone declaring it as decoupled from other risk assets over the last couple of years was simply wide of the mark.
To date, Bitcoin has risen and fallen in line with the rest of the market. The moves have been more explosive – its volatility is unmatched and hence it lives further out on the risk/reward curve than the stock market – but the direction of moves and correlation has always been high.
I believe this will change, and Bitcoin has all the properties to be an inflation hedge or act as a store of value akin to digital gold. But I don’t think that time is soon, and as for anyone claiming that is has already happened, the math simply doesn’t add up.
To reinforce this point one more way, again using simple mathematical principles, I plotted the daily returns of the Nasdaq against Bitcoin for each year.
Phrasing the above standard deviations another way (for those of you weirdos who don’t love statistics), the below shows the lower and upper bounds for which 68% and 95% of daily returns fall for both the Nasdaq and Bitcoin.
As can be seen, there is little to suggest in previous years that 2022 would or will be any different with regards to the volatility of Bitcoin vastly outstripping the stock market (additionally, this comparison focuses on the tech-dominated Nasdaq rather than the S&P 500, so one could argue it’s even understating the chasm between Bitcoin and the stock market with regards to volatility).
ConclusionCopy link to section
To wrap things up, the market chatter suggesting a decoupling had taken place between Bitcoin and the market (be it an inflation hedge or other) was misguided and likely a by-product of bull market hysteria.
Time and time again, we see human emotion craft up narratives or complicated analyses to explain repeated patterns or fit their pre-conceived notions. That’s what makes investing so maddeningly difficult. Making money is hard, people.
We are in the midst of a massive market pullback, countries are on the verge of recession (if not in it already) and sentiment is dire. Against this backdrop, Bitcoin was always going to go one way, and the scale of the move was inevitably going to supersede that of the stock market.
As I sign off, I want to re-affirm my belief that Bitcoin will deliver on its promise as a hard-capped, digital form of money that humanity has never had access to before. I believe its prospects in the long-term haven’t changed. But right now it has a long way to go, which means anyone investing in Bitcoin over a short-time horizon will need to accept that the volatility here can make that a very bad (or very good, to be fair) bet in the blink of an eye. Stay safe.