One alternative area of the market wasn't providing any refuge on a day when investors needed a place to hide.
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The world's largest cryptocurrency had its worst day in more than two months, slumping nearly 8% to $54,350 on Friday afternoon amid a rout in world stock markets due to the emergence of a potentially dangerous coronavirus variant. The drop undermined the argument of Bitcoin proponents who see potential in the token as a hedge against the turmoil in traditional risk markets despite its history of big swings and speculative frenzy.
Craig Erlam, senior market analyst at Oanda Corp, said that they never bought into Bitcoins as a safe haven when markets turn sour. We saw today that it is a risk asset and behaves as such. The correlation between the S&P 500 and the coin is positive and has increased to near its highest levels of the year, as risky assets like bitcoins don't always move in lockstep. When stocks move lower, it's likely thatBitcoin will do the same, diminishing its use-case as a hedge against volatility.
Other Bitcoin enthusiasts suggest that the cryptocurrency can be used as a hedge against inflation, pointing out its limited supply of 21 million token. If one buys that narrative, then it would make sense for the coin to fall on a day when Covid related news stirred up concerns that the global economic recovery may get derailed. Inflation fears have caused half of the recent returns ofBitcoin, with the other half coming from market exuberance and momentum trading.
If the recent trading action shows anything, it is likely that it is too early to evaluate the role ofBitcoin and other cryptocurrencies in a portfolio.
Ross Mayfield, investment strategist at Baird said that the evolving debate on what kind of asset will be, whether it's an inflation hedge and volatility hedge or just like a high beta risk asset.
The debut of U.S exchange-traded funds tied toBitcoin futures has put pressure on the company, which hit an all-time high of $69,000 earlier this month.
As usual, bulls were unbothered by the dip, and some were even willing to find some holiday spirit in the sell-off:
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