Bitcoin Could Go From “Growth Stock on Steroids” to “Gold on Steroids” – Fidelity’s Chris Kuiper

(Kitco News) Correlations between Bitcoin and other assets collapsed last year, suggesting Bitcoin may be behaving less like risky speculative stocks and more like gold, according to Fidelity.

In their recently published “2024 Look Ahead,” Chris Kuiper, director of research at Fidelity Digital Assets, noted that a year ago they were seeing strong correlations between digital assets like Bitcoin on the one hand and interest rates and risk assets on the other.

“Starting with interest rates, we found that there was a high inverse correlation between Bitcoin price and real interest rates, as falling interest rates were accompanied by rapid increases in Bitcoin price throughout 2020 and into 2021,” said Kuiper. “This inverse correlation continued into 2022 as real interest rates rose rapidly and Bitcoin subsequently collapsed. This seemed to make sense as Bitcoin is a non-cash yielding asset, so relatively speaking it appears more attractive in low and negative real interest rate environments and less attractive in higher interest rate environments.”

However, Kuiper said that over the past year, markets have seen “a complete decoupling of this relationship” as real interest rates continued to rise while Bitcoin not only maintained its value but rose sharply. “Could this be due to an idiosyncratic event, such as the anticipation of a spot ETP?” he asked. “Maybe. But we don't think so, because gold has also been exhibiting similar behavior recently.”

“We can only speculate what these real asset markets are saying, but one possible explanation is that both Bitcoin and gold are saying the bond market may be wrong, or that both assets are sensing something else, such as the United States.” “Always larger and structural budget deficits,” he wrote. “Perhaps the Bitcoin market is expecting more debt monetization from the Federal Reserve or interest rate cuts in the future, as our research shows that the price of Bitcoin is not highly correlated with consumer price inflation, but rather with the inflation of the money supply itself and various liquidity metrics.”

The other correlation that Kuiper says has broken down in 2023 is that between Bitcoin and other digital assets and traditional risk assets like stocks. “While investors and traders once treated digital assets like 'growth stocks on steroids' due to the correlation between them, they appear to have realized that Bitcoin could be different,” he said. “We expect that there will likely still be a sizable cohort that continues to place Bitcoin and digital assets in their 'high risk' bucket when investing, but over time we expect that Bitcoin's value proposition will not match its previous value proposition will return to a correlated state.” very different from high-growth stocks.”

Historically, there has been no long-term correlation between Bitcoin and gold, but recently both have rallied together. “However, Bitcoin has moved much higher, which leads us to ask: As investors flock to physical assets and continue to do so, will the narrative shift to Bitcoin as 'gold on steroids?'” Kuiper asked.

Kuiper pointed to a number of factors that limit the supply of Bitcoin in the market, which in turn has helped drive up the price, and which could continue to contribute to limited supply throughout the year.

“The first is that the amount of illiquid coins, or Bitcoin, that have not moved in more than a year has reached another all-time high of 70%,” he said. “The second reason is that Bitcoin has been delisted from exchanges and the number of coins (not the dollar amount) is down almost 30% from the previous peak.”

He noted that the recent crypto winter may have helped strengthen hodlers' control over their BTC, even after the leading crypto made big gains. “Even in the face of a Bitcoin rally of more than 160% (at the time of writing in mid-December), we have not observed these long-term and illiquid coins move toward profit-taking in response to price,” Kuiper said. “Of course, it remains to be seen whether further price increases result in some thawing of coins in cold storage, but so far it appears that these holders are waiting for higher prices.”

His conclusion is that the nature of Bitcoin and digital asset adoption is evolving as the market matures. “With each cycle, more coins entered stronger hands or those with much greater conviction and/or longer investment horizons,” Kuiper wrote. “We believe this will continue to contribute to the strong foundation on which 2024 will be built.”

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