The titanic liquidity injections from major central banks to finance the high cost of lockdown policies imposed by the governments led to a significant rebound in risky assets, particularly assets strongly sensitive to the liquidity metrics.
With global growth expected to significantly slow down in the coming 6 to 12 months and inflationary pressures now expected to remain elevated longer previously estimated, 2022 will be a challenging year for risk on assets.
Figure 2 shows that bitcoin’s correlations to tech stocks was close to zero between 2016 and 2020 and have been rising significantly in the past two years.
As opposed to gold, which has historically acted as a strong ‘hedge’ against periods of market frictions and soaring uncertainty, bitcoin has generally performed weakly in periods of high-volatility regime.
As we mentioned it earlier, bitcoin has probably joined the universe of risk-on assets that have been strongly sensitive to liquidity in the past cycle.
With US inflation hitting a four decade high of 8.5% in March, many practitioners have been speculating that the Fed is clearly behind the curve in its tightening process and may start to potentially accelerate its tightening cycle, proceeding with 50bps hikes in the coming meetings.
However, we can notice that the deceleration in liquidity has ‘ended’ the bull market that followed Covid and has led to a higher volatility on the cryptocurrency market.
On the other hand, ‘risk off’ assets have benefited from investors’ ‘flight to safety’ and therefore outperformed the rest of asset classes, giving investors the chance to preserve their capital in a period of massive economic and political uncertainty.
Academic and empirical research have shown that ‘inertia’, how well an asset has performed in the past, has been an important characteristic when defining the fundamentals of ‘safe’ assets.
It is clear that $30,000 represents a strong support on the cryptocurrency; a fall below that level would bring us to 2021 levels, erasing the gains accumulated in a period of extremely accommodative monetary policy.
On the topside, resistance to watch stands at $44,976, which corresponds to the 61.8% Fibo retracement of the 30,000 – 68,992 range.
Disclosure: I/we have a beneficial long position in the shares of UUP, GLD either through stock ownership, options, or other derivatives.