With the S&P 500’s volatility growing to level that of Bitcoin, we thought you may be interested in some original data and insights from CryptoCompare showing how digital asset markets are riding out the storm.
Below, we’re looking into how top cryptocurrencies are performing compared to the US market’s benchmark index.
Bitcoin’s Volatility Declines
We are seeing a flight to safety and the ultimate sanctuary in this climate has been the US dollar drawing capital from emerging market countries – with those whose economies are reliant on natural resources left especially vulnerable.
The Fed printing dollars to have a balance sheet of over $6 trillion as well as the IMF offering SDRs means that the dollar supply is going up.
The charts below are showing that the crypto market is down more than the S&P which is off its peak by 20%. Volatility shows the clustering effect and correlation amongst cryptocurrencies with 7-day volume sharply jumping.
The Bitcoin volume jump is not as bad as the CryptoCompare MVIS 5 index which itself has less volatility than the CryptoCompare MVIS 25 Index.
Inflation Is Coming
When the tide goes out, all boats sink and that’s what we have seen in this initial phase of the crisis. Bitcoin and digital currencies have been affected to a similar degree in the short term like traditional equity markets. But in the mid to long term, we might see some shifts when investors start to look at future scenarios as the dust settles. One thing is clear – inflation is coming. So TIPs, gold and utilities are the traditional ports of call – Bitcoin also fits the mold.
Highly leveraged companies will be in trouble in the short term without the ability to pass through rising costs. So the S&P will be a mixed bag where some companies will be caught with declining margins and others with demand rebounds and the Fed’s cash injection stimulating demand will have the ability to pass through their costs and increase revenues.
Bitcoin could see some use in cross-border transactions as we start to see emerging market currencies fail. The strong draw to the dollar will see increased restrictions on capital flows that will compel some citizens to look for other routes to preserve and move wealth. Higher sovereign risk premia and ratings downgrades are on the cards.
What Is Money?
This crisis is raising the question of what exactly is money – governments are being forced to open the doors to modern monetary theory (MMT) which removes the mirage of fiat. It might be difficult to go back from this unveiling, but what choice do governments have? There are the ghosts of Hayek and Keynes in these arguments.
Under these circumstances, we may see a shift to assets that cannot be perpetually diluted instead of papering over the cracks. For the moment, cash is the only port in the storm but that may prove to be a false hope in the mid to long term.
Its risk-off across the markets. Bitcoin is still novel and is great as a means of transferring value quickly, person to person, but bad at holding value. The theory is that, with time, this will change, but quite clearly, it has nascent, fragmented markets at present and isn’t fulfilling the digital gold story.
Charles Hayter, co-founder and CEO
Cryptocompare.com
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