Concerns about bitcoin’s attempt to become a long-term store of value have been reinvigorated by the recent drop in the cryptocurrency’s price, according to Goldman Sachs’ senior commodities analyst.
In a note to clients, Jeff Currie, Goldman’s head of commodities research, said that the trading behavior made bitcoin look more like copper than gold.
“Risk sentiment has shifted slightly more cautiously as a result of a new surge in Covid cases worldwide. This resulted in a renewed bid for defensive assets while removing some tailwind from risky assets, according to the note.
Furthermore, bitcoin’s difficulties occurred as other crypto assets gained ground, which would not be expected if bitcoin were clearly the dominant cryptocurrency.
“Bitcoin gave way to other cryptocurrencies like ether and altcoins. This, in our opinion, highlights the fact that competition among cryptocurrencies for the status of dominant long-term store of value is still ongoing and adds another source of risk to holding bitcoin,” the note said.
Concerns about bitcoin’s environmental impact, as well as a lack of real-world use cases, could lead to it losing its leadership position to a “better designed” cryptocurrency, according to Currie.
According to Coin Metrics, Bitcoin was trading slightly higher for the day at $55,234 on Wednesday morning.
The expansion of the crypto world
Many more institutions are becoming engaged with cryptocurrencies, and as a result, there will be more equities tied to digital currencies.
“Recently, it appears to be trading like a risk asset, but not in a reliable correlation that we can trust to remain in place,” Stockton said.
“However, it has recently been indicative of sentiment, and it has been treated as a risk asset. “You come in the morning,” she explained. “You can see bitcoin is down 10%. That is a check against equity market prices, in my opinion.”
Bitcoin was flat Tuesday morning, while stock futures were falling. According to Coin Metrics, Bitcoin was worth $56,129 at 9:40 a.m. ET. Following a 15% drop on Sunday, it was lower in early trading on Monday but stabilized around $56,000.
“I think bitcoin was a reflection of the risk appetite out there, and in general, if there is a sell-off in bitcoin, maybe that’s a sign of some risk aversion elsewhere,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.
“There’s a lot of giddiness in that space,” he said. “In terms of risk, there is a lot of ‘throw caution to the wind.’”
A relationship that may become more intense over time
Boockvar went on to say that it’s difficult to say whether there’s a long-term link between the crypto and equities markets.
Fundstrat’s vice president of digital asset strategy, Leeor Shimron, has investigated the relationship between the stock market and bitcoin. He discovers that it is sometimes highly correlated and sometimes not.
However, according to his theory, the link will only strengthen and they will become more closely correlated as the crypto market grows, with more institutional involvement and more crypto companies going public.
Cryptocurrency prices rose ahead of the Coinbase exchange’s initial public offering last week.
“It stands to reason that those correlations would grow over time,” Shimron said. At times, the correlation was greater than 80%, while at others, it was negative.
Bitcoin reached a high of just under $65,000 last week as investors focused on Coinbase’s offer, only to fall back to under $52,000 over the weekend. “We believe bitcoin will continue to rise for the rest of the year, even if we consolidate for the next few weeks,” Shimron said.
Bitcoin is expected to reach $100,000 by the end of the year, according to Fundstrat.
Stockton also predicted that the correlation would strengthen.
′′The more products that hit the market, whether it’s an ETF or another stock, the more products that are available for investors to trade, the more interest there will be,” she said.
“Everyone wants to find the new hot thing, and even if it isn’t new, it is hot,” Stockton explained.
The entry of more central banks with their own digital currencies could be the next big disrupting force in the market. China has taken the lead thus far.