Medha Singh and Lisa Pauline Mattackal

(Reuters) – The original cryptocurrency is maturing. It turns thirteen this year. The original cryptocurrency is beginning to show signs of maturity. However, be aware of the teenager tantrums.

The big bets made by institutional investors have led to bitcoin becoming more sensitive to interest rates. This has caused a drop in value and prompted investors this month, as they waited for the Federal Reserve’s hawkish policy meeting.

Born in 2009, cryptocurrency was still at the margins of finance and not closely related to the stock market during the Fed’s earlier tightening cycle from 2016-2019.

Times have changed.

According to data from Refinitiv, Bitcoin is positively related with the currency since early 2020. That means they move in a broad way together. From 0.1 in September’s, their correlation coefficient rose to 0.41. Zero means there is no correlation while 1 indicates perfectly coordinated movement.

According to an International Monetary Fund analysis, this coefficient was 0.01 for 2017-2019.

Ben McMillan (chief investment officer at Arizona’s IDX Digital Assets), stated that while bitcoin may not be held in its entirety by early adopters it is now sitting in a 60/40 portfolio. This refers to an institutional strategy which allocates 60% to more risky equities, and 40% to bonds.

It’s not surprising it is starting to trade at a higher rate of interest.

Bitcoin was below the $40,000 mark for the first-time since August 2021 Friday. This is a significant improvement on its November peak at $69,000.

GRAPHIC: Bitcoin SPX correlation, https://fingfx.thomsonreuters.com/gfx/mkt/klpykqanlpg/Pasted%20image%201643021234862.png

HEDGE AGAINST INFlation?

The cryptocurrency market has been increasingly defined by large investors rather than smaller retail traders who drove its first movements.

According to CryptoCompare, institutionally focused crypto investments products’ total assets increased from $36 billion in Jan to $58 billion December according to CryptoCompare.

Added to this was the huge buying by corporations such as MicroStrategy (NASDAQ:) or Tesla (NASDAQ.). Hedge funds also added crypto to their portfolios.

CryptoCompare stated that the cryptocurrency market grew to a total value of $2.22 trillion from $767 billion at its beginning and ended in 2018.

With mainstream finance moving towards bitcoin, there are more pressing questions for 2022. These include whether or not it can continue to be a diversification asset and an inflation hedge.

Researchers at the IMF stated that Bitcoin’s increased correlation with stocks reduced its “perceived risks diversification benefits” and raised the risk of financial market contagion.

Bitcoin can also be used as an insurance against inflation due to the fact that it is more scarce than gold. Gold, however, has a better record of holding value in inflationary environments. Its correlation to stocks has led it to become more agitated along with other markets, by the biggest annual increase in U.S. Inflation in almost four decades.

In the present case, Bitcoin isn’t acting as an inflation hedge. According to Nicholas Cawley (strategic at DailyFX based in London), bitcoin is acting as an inflation hedge.

Jeff Dorman (CIO) at Arca digital asset management firm in Los Angeles said: “It’s also a little ironic since the bull case in many digital assets was for higher inflation in spring 2020. It is now that inflation has weighed on the prices.

GRAPHIC: Bitcoin and traditional inflation hedges, https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnjkjwvq/Pasted%20image%201643025317392.png

“WAITING FOR HIGHER PRICES”

Evidence of investors increasingly holding onto bitcoin for the long-haul https://www.reuters.com/technology/bitcoin-investors-dig-long-haul-staggering-shift-2022-01-17 is growing.

Kraken Intelligence, an analysis blog of cryptocurrency exchange Kraken said that approximately 60% bitcoins in circulation have not been changed in the past year. This is the highest number since December 2020.

However, the funding rates of perpetual swaps between major exchanges, which are indicative of investors’ sentiment on future bitcoin price movements, were quite flat hovering at around 0.1% according to data platform Coinglass.

Traders who have positive rates are considered bullish because they pay more to keep a position. However, traders with negative rates must also pay extra to either hold a position that is shorter or to bet on the falling price.

According to Glassnode, a blockchain data provider that tracks cryptocurrency transactions, investors are showing a noticeable unwillingness to invest in coins.

The report stated, “In the face tumultuous prices and unconvincing price movement, this signals to this cohort that holders are patiently waiting until higher prices for their respective supplies.”