Before the cryptocurrency market started to fall hard a few months ago, the sentiment that crypto like bitcoin (BTC) may have a good hedge are against inflation. This may have turned out to be a bit too optimistic. According to the chief economist of the major crypto exchange CoinbaseCesare Fracassi, crypto now has almost exactly the same risk profile as stocks from the technology sector.
Crypto not a hedge?
In a blog post Fracassi makes it clear that he sees strong similarities between technology stocks and the crypto market. Both sectors have risen extremely fast since the pandemic in 2020. The correlation between the two sectors has also grown rapidly since then, according to Fracassi.
This is a relatively new phenomenon. Fracassi argues that since the inception of the world of crypto, this correlation has never been as strong as it is today. Not only is the correlation with tech stocks very high right now, according to Fracassi, there is also a strong correlation with oil and the pharmaceutical industry.
Since 2020, the correlation between crypto and the stock market has risen and with recent market movements we see how the market expects crypto assets to become more and more intertwined with the rest of the financial system in the future. (4/5)
— Cesare Fracassi (@CesareFracassi) July 5, 2022
“In the first ten years of its existence, bitcoin returns were on average uncorrelated with stock market performance, but since the COVID pandemic began, the correlation has increased rapidly. In particular, crypto assets today share similar risk profiles to oil commodity prices and technology stocks.”
Bitcoin and the stock market
Often bitcoin also compared to gold. Not long ago, it was even hailed as a possible replacement for gold as a protection against inflation. However, according to Fracassi, bitcoin is many times more risky than gold or silver as an investment.
According to Fracassi, the best comparison with bitcoin is the American car manufacturer Tesla. This company, which was obviously founded by the richest man in the world Elon Musk, is in many ways the same as bitcoin in terms of volatility. Fracassi also does not expect this correlation between crypto and the tech sector to diminish in the foreseeable future. On the contrary, he expects this to only grow.
“This suggests that the market expects crypto assets to become increasingly intertwined with the rest of the financial system, thus being exposed to the same macroeconomic forces that move the global economy.”