Assaying Digital Gold

Higher interest rates will affect all asset classes, and crypto is no exception. 

Bitcoin has been rallying recently, up six of the past seven days, but is still down 34% from its November high. It was trading this afternoon at     $44,502.

With the Federal Reserve now widely expected to increase its benchmark rate by a quarter point -- and possibly even a half point -- next month, there's concern that Bitcoin has a history of responding badly when the Fed changes course this way. 

“When the Fed is tight, Bitcoin isn’t the best place to be,” Barry Bannister, chief equity strategist at Stifel, told Barron’s Daren Fonda. The strategist sees Bitcoin as a “high-powered way to play Fed money losing or gaining value.” As a result, Bannister sees the cryptocurrency falling to $10,000 in 2023. 

The outlook is not all that dark, however. Daren noted: 

A bear market in Bitcoin due to excessively tight monetary policy isn’t imminent. The Fed is under pressure to raise rates just enough to tame inflation, without going too far and causing a recession

There is a robust debate on Wall Street, meanwhile, about how to value Bitcoin. Earlier this year, Goldman Sachs suggested that Bitcoin could rise as high as $100,000. 

Now, strategists at J.P. Morgan have pegged the fair value of Bitcoin at $38,000, pointing to the volatility ratio between gold and "digital gold."   Barron's Jack Denton explained: 

J.P. Morgan had previously projected that the Bitcoin to gold volatility ratio would fall to two times later this year, from five times, which would support prices. Strategists at the bank said that “seems unrealistic” and they now see the ratio declining to four times.

BofA Securities sees the "digital gold" story as having changed. "Inflation fears resulting from the Fed's policy decisions may have driven demand for Bitcoin" in early 2020, analysts led by Alkesh Shah noted yesterday. Yet the correlation between the cryptocurrency and gold has remained close to zero since last June, while the correlation between Bitcoin and stocks (S&P 500 and Nasdaq 100) has reached all-time highs, they wrote. 

The most bullish signal on Bitcoin this week may have come with the arrest of a Manhattan couple, accused of laundering Bitcoin that was stolen during the August  2016 hack of Bitfinex, a cryptocurrency exchange. The Justice Department said that at the time of the breach, the 119,754 Bitcoin alleged to have been illegally transferred was valued at $71 million. 

Today, those Bitcoin would be worth over $4.5 billion -- representing an annualized return of 109% over those 5.6 years. The S&P 500, in comparison, had an annualized return of a little more than 16% over the same time period. Hodling pays.