For investors, risk assets appear more attractive, at least in the near-term, as global central banks walk back plans to raise interest rates.
The Federal Reserve’s dovish pivot in recent months has fueled a rebound in stocks. Although some people remain skeptical of the recent rally, investors don’t seem to have many alternatives given the historical low yields from bonds.
Combined with a weakening outlook for the global economy, growth assets seem poised to outperform, a dynamic that could spread to Bitcoin and other crypto assets.
We strongly stand behind the long-term value proposition for Bitcoin as “digital gold.” A censorship-resistant, government-agnostic, digitally-native asset with similar characteristics to today’s traditional store-of-value assets offers immense potential for both developed and emerging economies.
However, in the near-term, Bitcoin poses greater risk than traditional safe haven assets (physical gold, Treasuries, etc.) given the speculative nature of the crypto market and the uncertainties surrounding blockchain technology. The short-term correlation between BTC and U.S. stocks, for example, has tended to rise when volatility strikes as investors seem to sell off stocks and Bitcoin at the same time.
Over the last few months, investors’ expectations have drastically shifted as the market no longer expects the Fed to hike interest rates for the rest of 2019. As of mid-April, the probability of a rate cut by the end of the year stands at nearly 45 percent.
Source: CME FedWatch Tool*
Growth stocks tend to outperform during periods of tepid economic activity or weaker expectations for corporate earnings because investors are willing to pay higher multiples for companies with considerable growth potential.
In such an environment, Bitcoin could benefit from investors reaching for riskier assets with significant price appreciation potential. For example, prices for Bitcoin and Chinese Internet stocks have followed a similar trajectory over the last five years amid historically low yields on government debt and subdued economic growth in much of the developed world.
KraneShares CSI China Internet ETF vs. Bitcoin Price
Sources: KraneShares ETFs**, BraveNewCoin
Rebound due for Bitcoin?
Our team has conducted extensive analysis on UTXO age trends (unspent transaction outputs – or the output of a transaction a user is able to spend in the future). We believe Bitcoin prices will soon rebound as the Crypto Winter starts to thaw out.
In our December report State of Bitcoin, we noted we were in an early accumulation phase similar to prior cycles, which led us to believe the bottom for BTC would be in by the end of Q1 2019. Bitcoin UTXO age trends have continued to progress as we originally expected with the steady rise in accumulation, and general selling exhaustion, from long-term holders in Q1. While this market is still highly speculative, we are seeing an improvement in its underlying fundamentals (recent growth in the number of bitcoin payments, increased Lightning Network capacity, etc.).
Correlations start to weaken
Another key theme we are monitoring closely is the extremely high levels of intra-market correlations between crypto assets, which tend to rise during periods of extended price weakness.
While many crypto assets continue to maintain strong positive correlations with one another, we are beginning to see signs of greater diversity in returns from different players. Smart contract platforms, gaming, and exchange tokens are just a few examples of sectors with notable out-performers in recent months.
This bodes well for the broader cryptomarket as periods of declining intra-market correlations have historically meant crypto assets prices will rise. For example, correlations fell from March through June as BTC more than doubled, gaining over 120 percent in the three-month period.
BTC 90-Day Returns & Large vs. Small-Cap Rolling Correlation (90-Day)
Sources: Coinmetrics.io, MVIS CryptoCompare Digital Asset Indices***
Many of the trends supporting risk assets in the near-term also serve as potential headwinds over the long-term horizon.
As global central bank policy turns more dovish, investors will seek riskier assets, including crypto. Although many institutions can’t directly invest in this space, where else can investors go if they want a 7 to 8 percent annual return?
Sovereign bond yields near historic lows essentially serve as a drag on portfolios if your target return is close to that range, as it is for most pension funds. Buying more stocks likely won’t be enough given expected returns for public equities over the next decade are drastically lower than the historical average.
Crypto is not just a hedge against the potential devaluation of major global currencies burdened by excessive debt and lackluster economic growth. The asset can also serve as a hedge against underperformance at a time when the outlook for traditional asset classes looks rather bleak.
** “KWEB seeks to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors.”
*** “MVIS Digital Assets Indices are the first and definitive family of benchmarks for the digital assets market. These indices provide institutional-grade access to the largest and most liquid digital assets.”
This full piece was originally published at Delphi Digital’s Quarterly Macro Outlook.