Some time ago, it seemed like cryptocurrency’s inverse correlation with other asset classes was indeed ‘flippening’. That does not seem to be the case any more.
As bitcoin skirts with peaks last seen in early 2018, in the low 9000s, it might not seem so outlandish to pose the question – Is bitcoin benefitting from a flight to quality/risk-off trade in the markers?
Bitcoin, by virtue of its design, protects investors against inflation and currency depreciation, features that are endemic to fiat currencies.
In the wake of increased geopolitical tensions, and as a result of rising trade war risks between the US and China, bitcoin could be potentially viewed as playing the role of an asset to hedge against macroeconomic risks. Figure 1 highlights how the recent rally of bitcoin in early May coincides with the depreciating Chinese Yuan against the US dollar.
Over the period when Chinese Yuan depreciated by about 2.5% against the US dollar, a sizeable move in less volatile FX markets, bitcoin price has rallied upwards from sub $6k to $8.5k. Although China has banned bitcoin trading, the OTC market remains vibrant and is serving a growing number of buyers and sellers everyday. Recent history has time and again shown us investors’ flight to bitcoin as a hedge against currency depreciation; first during the Cyprus banking crisis and also in 2015-16 when the Chinese Yuan depreciated by 10%. This new correlation lends more credence to the narrative of bitcoin as a potential hedge against currency depreciation in the modern world.
As can be seen from Figure 2, if you want to diversify your portfolio, consider adding a dash of bitcoin (pun unintended for both Dash fanboys and bitcoin maximalists!), or indeed any of the major cryptos. Even within cryptos (Figure 3) BTC clearly sets the tone, and the price of most of the major alts are linked to the price of BTC.