'Bitcoin Quacks Like a Growth Stock'
Bitcoin (BTC) is affected by external factors it can't control, but they show that the world's number one crypto is a growth stock, according to the October 2020 report by provider of crypto-asset data ByteTree in collaboration with crypto exchange Bitstamp.
While many like to believe that asset prices "have a mind of their own," wrote Charlie Morris, ByteTree Co-Founder and Chief Investment Officer (CIO), the truth is that they have "close links to external factors" outside of their control. Therefore, the report looked at six of these factors: central banks, the US dollar, global equities, social media stocks, real interest rates, and gold.
Morris argued that,
"There’s an old saying that if it quacks like a duck, it’s a duck. Bitcoin quacks like a growth stock."
Therefore, in respect to the six, above-mentioned factors, the CIO made the following conclusions:
Bitcoin is correlated with risky assets
As BTC responds to monetary conditions, it is naturally correlated with risk-on assets, including equities and credit, said the CIO. And while day to day moves have little in common, the longer-term relationships are more visible. Additionally, the relationship between bitcoin and global equities has been strengthening, though there have been periods of mismatch. "Once again, bitcoin is lagging risk assets in general," said Morris, and added that:
"Perhaps slightly more convincing than global equities is social media stocks," where although "the general trend is similar to global equities, the short-term correlations are slightly higher. This should not surprise because Bitcoin is an evolution of the internet, that follows the laws of the Network Effect."
Bitcoin and gold are opposites
Morris claimed that "notwithstanding the shared love of stimulus and an inverse reaction to the dollar, gold and BTC are more opposite than alike." The key difference, he said, is that gold is a risk-off asset - it outperforms equities and bitcoin "when the economic tide is going out" and it's unique because it thrives on falling real interest rates, rather than central bank stimulus.
When the US Federal Reserve in 2013 signalled they would raise rates in the future, gold collapsed and bitcoin surged, resulting in the worst year since 1981 for the former, and the best year for the latter. "How much can gold and bitcoin possibly have in common when they show diametrically opposite behaviour in response to a macroeconomic change?" Morris asked, and added:
"Incidentally, 2013 was a specular year for social media stocks (62%) as well, which supports my view that bitcoin is a growth asset. Growth stocks like rising real rates (defined here as the 10-year yield less the 10-year expected rate of inflation) whereas gold likes falling real rates. That is an opposite condition, and a clear distinction between the two assets. It means that a portfolio that embraces both gold and Bitcoin will have superior risk adjusted returns than either asset alone."
Combining negatively correlated assets – bitcoin and gold – will bring significant benefits to an investor, as it's "a remarkably effective strategy," Morris stated.
Bitcoin likes easy money
Bitcoin has performed best during periods of balance sheet expansion and worst during periods of contraction, said Morris, giving the monetary contractions of 2014 and 2018 as an example, as they coincided with "bitcoin’s worst years on record." Meanwhile, 2013 and 2017' "significant balance sheet expansion" coincided with bitcoin’s best years post-2012's early adoption surge.
Morris said that,
"It is most unlikely that the central banks bought bitcoin, but they don’t need to. Their balance sheet sits at the top of the monetary food chain, and as it expands, money flows around the system, like water at floodtide. [...] A rising tide floats all boats, and the price of bitcoin rises."
And while some might think that BTC "is owned a bounce" in 2020, other factors, such as the May halving should be taken into account.
Bitcoin likes a weak dollar
A casualty of easy monetary conditions is the USD, said Morris, adding that, as "markets turn bullish, money flows out of the dollar to the rest of the world." Bitcoin performed best during periods of dollar weakness, or its stability, while it dropped in 2014 and 2018, when the US dollar was strong.
"There can be little doubt that, like gold, Bitcoin likes easy money, which is why it is correctly seen as a hedge against money printing," the CIO said.
At pixel time (10:16 UTC), BTC trades at USD 10,829 and is up by almost 3% in a day an 4% in a week. The price advanced by 7% in a month and 27% in a year.