• Crypto prices have been rising off the back of expectations that interest rates may be cut sooner than anticipated, contradicting the narrative that crypto is uncorrelated.
• Assessing the price action of crypto through the pandemic and subsequent rate-raising cycle shows an extremely risky asset class that moves in line with other speculative asset classes.
• This proves once and for all that any narrative around crypto being an uncorrelated asset is dead.
Crypto markets have been on a tear in the beginning of the year, with digital assets surging to their strongest rally in 9 months. This is a stark contrast to the market conditions that existed at the start of 2020, when the world was gripped by the COVID-19 pandemic and economies ground to a halt. Governments responded to the crisis with stimulus packages of an unprecedented scale, while central banks around the world pursued ultra-low interest rate policy. This has resulted in a wave of optimism in the crypto markets, with investors expecting interest rates to be cut sooner than previously anticipated.
The recent performance of the crypto markets has debunked the narrative that crypto assets are uncorrelated with other asset classes. Assessing the price action of crypto through the pandemic and subsequent rate-raising cycle shows an extremely risky asset class that moves in line with other speculative asset classes. This has become even more apparent in recent months, with the correlated movements between Bitcoin and traditional stocks such as Tesla.
It is clear that the narrative of crypto being an uncorrelated hedge against traditional markets has been proven false. This is further emphasised by the recent surge in crypto prices, which is largely driven by expectations of further rate cuts by central banks. This proves once and for all that any narrative around crypto being an uncorrelated asset is dead.
The recent performance of crypto assets has demonstrated their extreme volatility and riskiness. Investors should be aware that crypto assets are highly speculative, and should not be considered a safe haven for their investments. Furthermore, crypto markets are subject to the same macroeconomic and geopolitical events that drive traditional markets, meaning that any correlation between the two is likely to remain in the future.