Bitcoin (BTC) may be down more than 30% from its all-time high of $ 69,000, but it has become one of the best-performing financial assets in 2021. BTC has outperformed the US benchmark, the S&P. 500 and gold.
Arcane Research noted in its new report that Bitcoin’s performance to date (YTD) turned out to be almost 73%. Compared, The S&P 500 Index rose 28% and gold fell 7% in the same period, marking the third year that Bitcoin has outperformed.
At the core of Bitcoin’s extremely bullish performance was higher inflation. The U.S. consumer price index (CPI) posted its biggest 12-month rise in four decades in November.
“Most economists did not see high inflation coming, as witnessed by consumer inflation expectations a year ahead,” the Arcane report read, adding:
With its 73% gain in highly inflationary 2021, Bitcoin has proven to be an excellent hedge against inflation.
Bitcoin holdings grew among institutional investment vehicles
Loose monetary policies and a sustained fear of higher inflation also prompted major financial firms to launch crypto-enabled investment vehicles for their wealthy clients in 2021.
Arcane reported an inflow of 140,000 BTC (~ $ 6.56 billion) through futures and spot-based Bitcoin exchange-traded funds (ETFs) and physically backed exchange-traded products (ETPs) this year.
That caused more units of Bitcoin to be absorbed by investment vehicles, emphasizing a greater institutional demand for the cryptocurrency.
In contrast, gold-backed ETFs witnessed an outflow of $ 8.8 billion in 2021, according to the World Gold Council report released in December.
Volatility behind superior performance?
Nonetheless, Bitcoin’s relatively superior performance in 2021 has included periods of high volatility.
Many analysts believe that extreme price fluctuations prevent Bitcoin from becoming an ideal hedge against inflation.. That includes Leonard Kostovetsky, a finance professor at Boston College, who recalled in his blog post that there were 13 days in 2021 when the price of BTC moved more than 10% in one direction. Excerpts:
“It seems strange to think that a person who is worried about having dollars because it lost 7% of its value in the last year would feel comfortable with Bitcoin, which could (and often does) lose so much value in a single day.”
Arcane also recognized Bitcoin as being more volatile than the S&P 500 in 2021, noting that the cryptocurrency “behaved like a risky asset” simply by amplifying the most significant movements in the stock market.
The researcher cited VIX, a measure of volatility expectation based on S&P 500 index options, to exemplify the relationship between Bitcoin and equity markets. SHe noted that the price of BTC fell sharply each time VIX readings spiked as of late, underscoring that institutional traders viewed Bitcoin as a risky asset.
As a result, the potential for Bitcoin to fall stronger in the wake of a stock market correction also increased. Arcane also noted that a bearish 2022 for the S&P 500 may end up erasing a large chunk of Bitcoin’s gains.
“So, be aware of the stock market headwinds in the coming year and their potential implications for the short-term price trajectory of bitcoin,” he added.
But hedge fund manager Chris Brown went far in predicting outright Bitcoin doom in 2022. Managing member Aristides Capital stated that cryptocurrencies could face sell-offs in the future when the US Federal Reserve ends its $ 120 billion-a-month asset purchase program followed by three rate hikes next year. .
“If the Fed actually raises rates enough to make the money considerably less loose, or if the markets believe they will, you will see certain areas of speculation come to a sudden halt,” Brown said, adding:
The best example of such asset speculation is cryptocurrency; here is $ 2.64 trillion of “wealth” that is not backed by anything and does not generate cash flows.
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