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Bitcoin is more a risky asset than an inflation hedge, says Bank of America

Although bitcoiners promote cryptocurrency as anti-inflationary “digital gold”, Bank of America (or BofA) claims that this is not the case.

Bitcoin is more a risky asset than an inflation hedge, says Bank of America

Bitcoin is more a risky asset than an inflation hedge, says Bank of America

A recent company report indicates that the crypto asset moves much more similarly to risky assets such as stocks, and reached record correlations with the S&P 500 index in late January.

According to the research note, titled “Global Cryptocurrencies and Digital Assets,” bitcoin (BTC) has been trading as a risky asset since July 2021.

It was around the same time that the price of bitcoin showed signs of significant recovery after a 50% price drop in May 2021.

Risky assets are characterized by their high volatility. Stocks and currencies fall into this category.

“Correlations on January 31 between bitcoin and the S&P 500 (SPX) and between bitcoin and the Nasdaq 100 (QQQ) reached record highs and a percentage of 99.73, respectively,” the report stated.

Meanwhile, the asset maintained a close to zero correlation with gold during this period. Bitcoin is often compared to gold as a hedge asset (although gold does not).

Unlike other cryptocurrencies such as ether (ETH), bitcoin has a fixed issuance schedule in its supply.

The cryptocurrency will be mined more and more slowly over time until it reaches a cap of 21 million coins. This causes some investors to use it as a hedge against rampant currency devaluation, often preferring it over gold.

The correlation between bitcoin and gold was strong at the beginning of the pandemic, after promises of intense stimulus from world governments in March 2020. However, BoFa believes that, now, bitcoin will not be adopted as an inflation protection in countries. under development or lose its status as a risky asset until its price volatility drops.

While bitcoin’s correlation to risky assets is strong, it has a small propensity to react to US Federal Reserve inflation policies and statistics, despite being able to do so in unpredictable ways.

In November, the price of bitcoin rose to a record $69,000 shortly after October’s inflation figures were revealed: 6.2% (a 30-year high at the time).

But bitcoin and equities tumbled that month when the Fed chairman stopped considering inflation a “transient” phenomenon.

However, the BofA report acknowledged that bitcoin can act as a reliable inflation hedge in underdeveloped countries with more inflationary environments.

This is in Turkey, where bitcoin was trading at record highs denominated in Turkish lira in December despite trading at a lower dollar price.

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