A 50-basis point rate hike isn’t only affecting stocks and bonds as the cryptocurrency market is also getting a fair share of downward price pressure amid hot inflation. As such, the market uncertainty is creating an unwinding of risky assets that include digital assets.
From cryptocurrencies to non-fungible tokens (NFTs), digital assets are certainly seeing the market equivalent of a sophomore slump, assuming that 2021 was the freshman run. Last year saw strong bullish overtones hitting crypto markets with Bitcoin and Ethereum both reaching all-time highs near the end of the year.
Enter 2022 and both have been languishing amid rising consumer prices and Fed monetary policy tightening. Bitcoin is down about 25% for the year while Ethereum is looking at an almost 30% drop.
“With inflation pegged at 8.5% in March and the Fed instituting its steepest rate hikes in 22 years to try to bring it down, Americans across the economic spectrum – not only those in lower-earning segments of society – are grappling every day with economic dilemmas they haven’t faced for decades,” wrote Michael J. Casey in CoinDesk.
“This uncertainty is an unpleasant experience for anyone other than the savviest (and luckiest) people who figure out how to make money in an inflationary environment,” Casey added.
Bitcoin Price data by YCharts
Bitcoin Beyond a Store of Value
Given that Bitcoin has been following stocks and bonds downward, it appears the leading cryptocurrency, or all cryptocurrencies in general, could be losing its status as an uncorrelated asset. In effect, they are, but the way they’ve been following the traditional markets might seem otherwise.
Casey, however, argues that Bitcoin can serve beyond the digital asset market’s version of gold. In particular, it can offer its own form of governance in an environment where faith in the government might be waning.
“Now, Bitcoin offers an alternative, one with valuable properties beyond just being a store of value,” wrote Casey. “Most importantly, bitcoin is digital, which means it can be integrated into the predominant internet economy with programmable capability. And its functionality – both its enforced scarcity and its transaction and recording mechanisms – is set by what is essentially a communal process of consensus.”
“In other words, Bitcoin is actually an alternative governance system for our money,” Casey added. “There’s no guarantee that people will choose it en masse, but this current era of economic and government uncertainty and the mistrust it will sow in institutions offers as good a case as any for them to do so.”
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