The Crypto Coaster: What’s Sending Bitcoin on a Wild Ride?

Inflation has risen to multi-year highs above 7%, and although bitcoin has been viewed as an inflationary hedge over the past several years due to its store of value, it remains a risky asset for investors. As the economy has recovered from COVID-19 at a slower-than-expected pace, this has lengthened the duration of the Fed’s spending and supported the equity markets, and in turn, cryptocurrencies. The Fed’s tapering of Treasury purchases and subsequent rate hikes mean that investors will likely continue the temporary sell-off of risky assets and begin investing in traditionally safer assets like fixed income.

Not only is the Fed’s battle with inflation affecting cryptocurrency prices, but also the potential intervention of regulation within the digital asset space has worried investors. Although recent events in Russia and Ukraine have been prioritized by the Biden administration, they’ve announced that they are working on a framework for how to regulate digital assets. Part of the allure of bitcoin and the blockchain has been the lack of regulation. If the government does follow through with a plan to regulate digital assets, it could deter further cryptocurrency adoption and investment.

Finally, in years prior, investors looked at bitcoin and other cryptocurrencies as alternative investments to the equity markets due to the low correlation between the two asset classes. As bitcoin becomes more widely accepted and adopted, it should become increasingly correlated with stocks and other risky assets. As of writing, the S&P 500 is in a correction, down over 5% in 2022. Although we do not have the same rules and thresholds for cryptocurrencies, bitcoin is experiencing similar day to day volatile swings overall, although it has rebounded since being down over 50% in early January.

Given the current geopolitical difficulties, potential regulation, and the Fed’s ongoing struggle to safely guide the economy through the COVID-19 recovery – and, in turn, high inflation – volatility in bitcoin is likely to continue in the coming months. The asset has always been highly volatile and experienced large price swings, and although it is down more than 30% since its all-time highs in November, its long-term prospects remain bullish.