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Key Takeaways

• Bitcoin has closed the yr down 64%, its worst yr since 2018
• This bear market is different, as for the primary time ever in Bitcoin’s existence, the broader financial system is additionally pulling again
• Bitcoin’s correlation with the inventory market is extraordinarily excessive, proving it trades like a high-risk asset
• Fans will hope this hyperlink could be damaged, however presently, it presents as a frightening macro local weather for Bitcoin and one which has unsurprisingly crushed its value over the past yr

Cryptocurrency buyers might be joyful to shut the guide on a dire 2022. 

Prices throughout the asset class collapsed, because the world transitioned into a brand new rate of interest paradigm, with the period of low-interest fee, low cost cash formally over. Risk property acquired crushed, and there are few investments additional out on the chance spectrum than crypto. 

Looking at Bitcoin, the world’s flagship cryptocurrency closed the yr at $16,547, in contrast to the $46,311 it entered the yr at. That interprets to a fall of 64%. But how dangerous was the is efficiency traditionally, for an asset which is infamous for each explosive features and bone-chilling losses?

2022 the second-worst yr for Bitcoin

Looking at annual returns since 2011, the primary yr when enough liquidity and value knowledge have been out there, exhibits that Bitcoin’s 64% drop this yr was its second-worst quantity, behind solely the 72% drop in 2018. The latter got here after a run-up in direction of $20,000 in late 2017, the primary time Bitcoin really entered mainstream consciousness. 

Amid this context, the numbers present that 2022 might simply be one other yr, proper? Bitcoin has fallen many a time previously, and all the time rebounded. Unfortunately, there is a catch this time.

Bitcoin experiencing a recession for first time ever

Satoshi Nakamoto printed the Bitcoin whitepaper in 2008, I the aftermath of the Great Financial Crisis. Engrained within the Genesis Block is a reference to British newspaper the Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” 

Frist buying and selling in 2009, Bitcoin was subsequently propelled into this post-crisis atmosphere, a local weather of zero (and even destructive) rates of interest, a heat cash printer and explosive returns in threat property. A fast have a look at inventory market returns since Bitcoin’s launch exhibits that, till this yr, issues had been plain crusing.

And so for the primary time in its historical past, Bitcoin is experiencing a pullback within the wider financial system. The cash printer has been turned off and rates of interest have been hiked, with the Federal Fund fee now 4.25% – 4.5%.

This is vitally necessary as a result of regardless of what some Bitcoin evangelicals could argue, Bitcoin trades as a high-risk asset. The value knowledge merely proves this with no shadow of a doubt, as its correlation with the S&P 500 is sky excessive – and solely rose final yr after rates of interest started to be hiked in April 2022, as I wrote about in this piece, and proven on the graph under.

Previous bear markets will not be the identical

This is why extrapolation of prior bear market bouncebacks for Bitcoin is naïve. The world is a different place now than at another time in Bitcoin’s historical past. The free cash up-only market couldn’t persist ceaselessly, and now it is time for Bitcoin to present the world what it is made from. 

Bitcoin is usually in contrast to gold, however the shiny metallic has confirmed over a protracted pattern house that it may be thought of a hedge and a good retailer of worth by which buyers can protect their wealth. Plotting the returns of gold traditionally under present clearly that it rises in instances of uncertainty. This is the type of chart that you really want to see as we enter a recession. 

Unfortunately, Bitcoin has to date traded with an uber-high correlation with the inventory market. In time, advocates hope that this hyperlink might be damaged. That is up for debate, however what is for certain proper now is that Bitcoin is as removed from a “hedge” because it might probably be. 

If the Federal Reserve turns dovish and eases off on rate of interest hikes, you may ensure that asset costs will bounce once more – and people additional out on the chance spectrum, like tech shares and Bitcoin, might be among the many large winners. 

In the long-term, the trillion-dollar query is whether or not this correlation could be damaged and whether or not Bitcoin can obtain the coveted retailer of worth standing.