This analysis is by Bloomberg Intelligence analyst Mike McGlone. It appeared first on the Bloomberg Terminal.
The crypto market at the start of May appears as a nascent revolution in fintech and money vs. some purging of speculative excesses and headwinds from the Federal Reserve. A lack of supply elasticity is a key attribute of top cryptos — Bitcoin and Ethereum — as demand and adoption rise, with related favorable price implications. The first 50-bp rate hike from the Fed in over two decades is price resistance for all risk assets, notably those that have rapidly inflated. Cryptos are tops when it comes to speculation, appreciation and risk, yet the stalwarts — Bitcoin, Ethereum and the proliferation of crypto dollars — are shining.
Our key takeaway from Bitcoin 2022 in Miami and Crypto Bahamas is that what’s happening to advance money and finance into the 21st century is unstoppable.
Bitcoin, cryptos gaining an edge as tide goes out on risk assets
The process of increasing Bitcoin and crypto adoption, institutional involvement and declining volatility vs. most conventional risk assets is gaining momentum at the start of May. Our view is to not buck the “trend is your friend” mantra, as greater risks may face those who fall behind and don’t at least partially allocate.
A top indicator for Bitcoin and crypto bottom
The fact that the world’s most fluid, 24/7 trading vehicle — Bitcoin — was down only about 15% in 2022 to May 3 vs. 20% for the Nasdaq 100 Stock Index may portend the crypto transitioning to a risk-off asset. Our graphic shows a leading indicator for a Bitcoin trough — when fed funds futures in a year bottom. A primary catalyst for this is a lower stock market, if previous patterns repeat. In May 2018, Bitcoin dipped below its 50-week moving average for the first time in about three years. The stock index sustained below this mean in November, and when it did, the white line in our chart (fed funds future No. 13) bottomed.
We see parallels in 2022. A leading indicator in 2015, Bitcoin has shown divergent strength vs. the stock market in 2022 despite its higher trading volatility.
Bitcoin may bottom with Fed rate-Hike expectations
Bitcoin risk approaching new lows vs. Stock market
High volatility should be expected with a nascent technology/asset, yet Bitcoin risk measures are nearing new lows vs. the stock market at the start of May, with related price implications. Continued maturation into the mainstream is our takeaway from the graphic showing 90-day volatility on the crypto approaching 2020 bottoms. About 90 business days into 2022, Bitcoin is ripening for a repeat of 2020, when its volatility declined as it rose for most other risk assets, notably equities.
Increasing adoption and institutional acceptance appear to be interchangeable and part of what we see as the increasing likelihood that the Bitcoin/Nasdaq price ratio (at about 3x) is more likely to sustain its upward trajectory. When this volatility measure bottomed in 2020, the ratio was closer to 1x.
Adoption, maturation and Bitcoin beating equities
Cryptos going mainstream may be unstoppable
The latter part of “gradually then suddenly” may characterize the crypto markets’ trajectory of outperforming stocks at the start of May. At about 2x, 90-day volatility on the Bloomberg Galaxy Crypto Index (BGCI) is approaching its all-time low from 2020 vs. the same measure of the Nasdaq 100 Stock Index. What we find notable from our graphic is that the first time the BGCI reached its current level vs. the stock index in 2017, crypto volatility was around 9x that of equities.
Facing an emboldened Federal Reserve fighting inflation and excessive wealth effects of 2020-21, the nascent crypto market appears well poised to resume outperforming most of the more entrenched asset classes. Cryptos represent a revolution in financial technology and money vs. potentially overextended equity prices.
BGCI set to outperform equities – Volatility
