Michael Novogratz, chief executive of Galaxy Digital, says the popular mantra that Bitcoin is a hedge against economic turmoil is a myth. Case in point: Last week, coronavirus fears wiped out $6 trillion from the global markets. Over the same stretch, the dominant cryptocurrency hardly surged. Instead, it dumped from $10,000 to as low as $8,410.
Novogratz says the recent joint sell-off of both Bitcoin and the equities markets shows that investors are not afraid to pull out of risky investments like cryptocurrency when fear grips the global economy at large.
Such a strategy subjects Bitcoin to external factors such as stock market price movement, global economic conditions and geopolitical risks.
Writes Novogratz,
“How did BTC go from being a hedge against bad stuff to getting washed out and trading like a risk asset? When things go from bad, to very very bad like they did last week, investors take leverage down as fast as they can. They book profits to make up for other losses. Ouch.”
A study published in the Annals of Operations Research supports Novogratz’s claim. According to Dimitrios Koutmos, an assistant finance professor at Worcester Polytechnic Institute in Massachusetts, interest rates and stock market volatility have an impact on the price of Bitcoin.
“Other asset pricing risk factors, such as interest rates and implied stock market and foreign exchange market volatilities, are important determinants of Bitcoin returns.”
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