The rise and fall of the bitcoin market: watch out for the teens

This picture illustration of the stock graph shows the illumination of the stock graph on the representations of virtual currencyBitcoin in this picture illustration taken March 13, 2020. REUTERS Dado Ruvic

The original criptocurrency turns 13 this year and is showing signs of becoming a mature financial asset - but watch out for the teenage tantrums.

The big bets of institutional investors have led to a sell off of the coin this month as investors braced for a hawkish Federal Reserve policy meeting.

The cryptocurrencies, born in 2009, was still on the fringes of finance during the Fed's previous tightening cycle from 2016 to 2019 and was barely correlated with the stock market.

According to Refinitiv data, the S&P 500 index SPX has been positively correlated with Bitcoin since early 2020, meaning that they generally move up and down together. Their correlation coefficient has now risen to 0.41 from 0.1 in September, where zero means no correlation and 1 implies perfectly synchronised movement.

The International Monetary Fund analysis shows that the coefficient was just 0.01 in 2017 -- 2019 compared to 0.01 in 2017 - 2019, based on an analysis by the International Monetary Fund.

Ben McMillan, chief investment officer of Arizona-based IDX Digital Assets, said that the institutional strategy of allocating 60% of a portfolio to risky equities and 40% to bonds is not completely held by early adopters, but instead is sitting in a 60 40 type portfolio.

It's not surprising that it's starting to trade with more sensitivity to interest rates. For the first time since August 2021, the price of the digital currency fell below its November peak of $69,000, some way off of its November peak of $40,000.

The market for cryptocurrencies is being characterised by big investors rather than the smaller retail players who drove its early movements.

The total assets under management of institutionally focused investment products rose from $36 billion in January to $58 billion in December, according to data provider CryptoCompare.

There was bumper buying from the corporate likes of MicroStrategy MSTR.O and Tesla TSLA.O as well as hedge funds adding to their portfolios.

The total market value of the criptocurrency grew from $767 billion at the beginning of the year to $2.22 trillion by the end of the year, according to CryptoCompare.

The drift towards mainstream finance raises questions about whether bitcoin can be a diversification play and a hedge against inflation in 2022 and beyond.

IMF researchers said that bitcoin's increasing correlation with stocks limited its perceived risk diversification benefits and raises the risk of contagion across financial markets. It is also often regarded as a hedge against inflation due to its limited supply akin to gold, the more established store of value in an inflationary environment. The largest annual rise in U.S. inflation in nearly four decades has resulted in an increase in its correlation with stocks.

In the current case, bitcoin is not acting as an inflation hedge. Nicholas Cawley, strategist at DailyFX, said thatBitcoin is acting as a risk-proxy.

Jeff Dorman, CIO at Arca in Los Angeles, said it was a bit ironic, given that the bull market for many digital assets in spring 2020 was expecting higher inflation. Now that we have inflation, it is weighing on prices. Evidence of investors holding onto bitcoin for the long-haul is growing. Kraken Intelligence, a research blog from Kraken, said that 60% of all of the digital currency in circulation hadn't changed hands in over a year, the highest level since December 2020.

As per data platform Coinglass, funding rates for perpetual swaps across major exchanges were fairly flat, hovering around 0.01%, as per sentiment among investors betting on the future price movements of the digital currency.

Positive rates mean traders are bullish as they have to pay to hold a long position, while negative rates mean traders have to pay to hold a short position or bet on the price falling.

According to Glassnode, investors are displaying a lack of willingness to spend coins.

This signal indicates that this cohort of holders are patiently waiting for higher prices to spend their respective supply, despite the tumultuous and unconvincing price action.