The short(er) term story on Bitcoin

The future arrived early. Adoption rates of cryptocurrency and investor allocations are surprisingly high already. Elevated investor sentiment readings and potential slowdown in economic growth rates alone would warrant caution. But as persistent inflation causes the Fed to reassess its stance, bitcoin could be headed for a steep correction in the months ahead.

According to a number of surveys, a higher share of U.S. investors now own a cryptocurrency (c. 13%) than own the historic ‘fiat currency alternative’ gold (c. 11%). What’s more, the value of cryptocurrency held is probably already not too dissimilar from the levels of investment in gold ETFs (c. $105bn). After all, crypto-linked products like Grayscale alone account for about $83bn. On top of that there is the direct purchases of crypto-currency on platforms like Coinbase.

For those that do own cryptocurrency, the allocation in a typical portfolio appears disproportionately large considering the asset’s volatility (Bitcoin is c. 4x the level of equities) and it’s correlations. By way of example, Millenial investors with crypto exposure are estimated to have allocations of c. 8% of invested assets, which would account for perhaps 40% of the portfolio’s risk.

Source: Portfolio values of demographic cohorts via Federal Reserve data. % of portfolio assumes the individual’s crypto exposure is in-line with the overall population median.

Uses 2-day price change and rolling 60 day correlation

Bitcoin’s correlation with equities varies through time, but it has greater tendency than some other asset classes to have a positive relationship to equities — indicating a less effective hedge. The box-and-whisker chart plots the quartile ranges over the past four years.

‘Money supply’ aggregates figures from the US, Eurozone, Japan, China, Australia and Canada (converted into US$)

While Bitcoin’s limited history reduces the scope for fundamental analysis, it would appear to have a loosely positive relationship with global money supply growth rates. And in contrast to gold, performance seems to be linked to improving economic conditions.

Recession probability 12 months ahead. Source: Philadelphia Fed Survey of Professional Forecasters