Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Safe haven status or hazardous tech stock?
Last week’s US Federal Reserve’s decision to increase interest rates by half a percentage point saw the Dow Jones Industrial Index tumble by 1,000 points (-3.12 percent). It also saw the price of Bitcoin, Ethereum, XRP, Luna, Solana, Cardano and Avalanche go into free fall. Bitcoin wiped around $100 billion from the combined crypto market in mere minutes. The heightened market volatility is due to rising inflation, geopolitical crises, and concern over tighter monetary policy by the Fed.
The Bitcoin price is currently down around 8.37% at the time of writing and is trading at US$36,349. It fell as low as US$35,856.52. The sudden crash in cryptocurrencies across the board comes amid an equity led sharemarket rout underpinned by fears of a possible recession. The tech-heavy Nasdaq was hit hard, losing roughly 5 percent with many investors believing that the Fed would have treaded cautiously, so not to spook markets. Tech stocks were hit hardest. Apple fell 5.6 percent, Google lost 4.8 percent, and Amazon dropped 7.6 percent.
What was most interesting, is Bitcoin’s ‘safe haven’ status, is now well and truly gone. Cryptocurrencies are being treated as risk-on assets, similar to tech stocks. It’s entirely possible, that investors are selling risk assets across the board and because Bitcoin has come a long way from its beginnings with institutional interest, people are valuing Bitcoin more like a tech stock than gold.
Thursday’s stock sell-off suggests, Bitcoin can no longer be deemed a safe haven asset. These sharp slides call into question the once touted defensive qualities during times of geopolitical risk. And the most popular belief, that ‘Bitcoin is a hedge against uncertainty and inflation’, is no longer true. The crypto market has transformed.
Crypto’s positive correlation with gold is long gone. Instead, it has been increasingly tracking the stock market lately. Because of its mainstream adoption, it seems to be even more intertwined with macroeconomic factors. Safe-haven assets should be positive or at worst stay close to zero during times of a financial market collapse.
The price of gold is +0.08 percent at US$1,877.
It’s a massive blow for the cryptocurrency as its key investment case for investing has deteriorated. It can also no longer be referred to as a store of value that’s uncorrelated with other financial instruments. Investors need to assess whether even a small allocation to Bitcoin is providing value to a portfolio or whether it substantially increases portfolio downside risk. If the US Fed continues its rate hiking cycle, investors will continue to unwind risky bets.
That can only mean, there’s more to come for Bitcoin and friends.
