Many analysts see BTC as digital gold, a hedge against inflation and uncertainty. Currently, the price of Bitcoin behaves more like a risk asset than a store of value.
Various factors have impacted the price of Bitcoin (BTC) since its inception, but that is not unique to the cryptocurrency.
As BTC emerged during a global economic crisis in 2008, institutions in the traditional financial, economic and monetary system distrust it.
The correlation of the Bitcoin price with the traditional stock market is relevant to some. They do not know whether cryptocurrency could become another investment vehicle.
Experts See Bitcoin as Digital Gold
Throughout history, people have looked to gold as a store of value in times of crisis. Given its correlation with the stock market, the precious metal allows keeping money safe and even experiencing an appreciation.
For that reason, many experts have seen the pioneering cryptocurrency as digital gold, as it is a hedge against possible economic crises.
Factors that Influence the Price of BTC
Since the unchanging scarcity of Bitcoin is one of its crucial characteristics, the supply and demand law allows understanding its price fluctuations. Contrary to fiat money, everyone knows that the supply of the cryptocurrency has a cap of 21 million units.
The increase in demand for Bitcoin, whose supply is decreasing, generates upward pressure on its price. For that reason, the cryptocurrency community sees institutional adoption as a bullish sign.
The supply and demand law works for both the rise and the fall of the price, as a selling pressure will cause a bearish trend.
Bitcoin derives much of its value from limited supply and growing demand during heightened inflation and uncertainty. However, the cryptocurrency differs from other assets because of its volatility and the momentum given by news.
Correlation of Bitcoin with the Stock Market
Before the pandemic, a report from the International Monetary Fund (IMF) indicated the low correlation of cryptocurrencies with leading stock market indexes.
When the correlation coefficient is closer to -1, the price of Bitcoin moves in the opposite direction to the stock. However, if it is nearer 1, the value of the former tends to move in the same direction as the latter.
According to the IMF, the correlation coefficient between the movement of Bitcoin and the S&P 500 between 2017 and 2019 was only 0.01. However, the onset of the pandemic in 2020 sparked an increased risk appetite among investors.
Between 2020 and 2021, the correlation between assets was 0.36, as they began to move more in the same direction. In January, Kaiko indicated the highest correlation of Bitcoin with the S&P 500 (0.61) and the Nasdaq (0.58) since July 2020.
Relevance of the Correlation of the Pioneering Cryptocurrency
Bitcoin and the other cryptocurrencies emerged as an alternative to a broken financial system. However, many wonder why the crypto market is in the red.
Currently, there is a situation of uncertainty worldwide due to the inflation of the US dollar. That indicates that governments are the owners of money and can use it as they wish.
Michael Saylor, the CEO of MicroStrategy, explained that cryptocurrencies are not shining because of the conflicting investment profiles active in Bitcoin.
The executive believes that the stock market governs much of the capital invested in Bitcoin. For that reason, investors act in the cryptocurrency market just like they do in the stock market.
Saylor stated that the status quo would disappear at any time, and Bitcoin would serve as a long-term investment.
By Alexander Salazar
