Bitcoin the best-performing asset class of an ugly Q3

What was the best-performing asset class in Q3? Believe it or not, it was Bitcoin.

The world’s biggest cryptocurrency topped the ranks with a boisterous 3.1% return. Hmmm.

Yeah – perhaps nothing sums up the abhorrent market more than the best-performing asset class scraping in as barely positive. Precious metals yielded 1.3%, while cash investors rejoiced at a 0.2% return. Every other asset class? Negative.

As inflation has rumbled, the Federal Reserve has hiked rates, sending markets into a tailspin. Throw in a war in Europe, an energy crisis as the winter approaches, and myriad other bearish factors, and it starts to make sense why the market has been plummeting.

Bitcoin one of the worst assets to hold

Looking at yearly returns, rather than just Q3, paints a different story. Bitcoin has freefallen, shedding over half its value thus far – well south of some other major asset classes, as shown in the chart below.

As the market has turned risk-off, returns have generally been in line with what is to be expected during bear markets. That is to say, the further out on the risk spectrum, the further assets have fallen.

For crypto, this is bad news and the reason Bitcoin has been so putrid. It also explains how nearly every other cryptocurrency has fallen further than Bitcoin.

Looking at the above figures, the S&P has fallen 25%, roughly half of Bitcoin. I actually would have guessed it would be more, had you asked me at the start of the year where Bitcoin would be if the stock market nuked 25%.

The Nasdaq is further out the risk curve, being more tech-focused, with a drop closer to 30%. And gold does what gold does – hangs in there.

Dollar is the best-performing asset

In times of crisis, investors flock to safe-haven assets – for evidence of this, look no further than the fact the US dollar has been incredibly stout thus far this year, dominating almost every currency worldwide.

There is, after all, nothing safer than the US dollar. Adding to this fact is that so many liabilities worldwide are USD-denominated, meaning debtors scramble to obtain dollars. Additionally, the Federal Reserve has hiked more aggressively than many other major currencies, such as Europe and Japan, attracting capital flows to take advantage of higher yields and thus strengthening the dollar further.

What does Q4 hold?

The fate of Bitcoin, stocks and other assets in Q4 will largely hinge upon inflation and interest rate rises (what is new?).

The next CPI reading is Thursday (October 13^th) and hence we should see volatility to close the week and a sign of what things could hold for Q4.  If inflation misses, expect a hawkish Fed and more sell-offs across the market.

But if Q4 can deliver OK CPI readings, and avoid major negative macro implications, it could at least be in store to outperform what was a dreadful Q3. In other words, in the short-term, nobody knows. But the next part is training all eyes on Jerome Powell this Thursday.