Preface

$Bitcoin (BTC.CC)$ In its 15-year history, Bitcoin has experienced significant growth and volatility, from being unknown to becoming an asset held by many individuals and institutions around the world. As a global, decentralized, and fixed-supply non-sovereign asset, the risk and return factors of Bitcoin are very different from traditional asset classes, usually unrelated in the long term. Although short-term market behavior may cause Bitcoin prices to deviate from its fundamentals, in the long run, Bitcoin is usually able to overcome these short-term fluctuations. For example, on August 5, 2024, global market turmoil caused a sharp drop in Bitcoin prices, but it usually rebounds and recovers to pre-sell levels within three days. This rebound demonstrates that Bitcoin is able to maintain its value under short-term market pressure, validating its resilience as an independent asset class.

Introduction

Investors often inquire whether bitcoin is a risky asset or a safe-haven asset, especially when making initial investments. They are concerned about the long-term correlation between bitcoin and traditional assets such as stocks and bonds, as well as how it is influenced by actual interest rates and market liquidity in the United States.

However, due to the unique nature of bitcoin, it is not suitable for traditional financial analysis frameworks. The long-term return factors of bitcoin are fundamentally unrelated, and sometimes even opposite, to traditional assets. In the long run, the driving factors of bitcoin may differ from the global macro factors that affect most traditional assets. Despite the volatility, the correlation between bitcoin and stocks is usually limited to periods of extreme market fluctuations. This article will explore this complex relationship.

Why is bitcoin important?

Since its introduction in 2009, bitcoin has become the first widely adopted internet-native currency. Its technological innovation lies in creating a digital-native, globally accessible, scarce, and decentralized form of money. These characteristics have allowed bitcoin to make breakthroughs in addressing long-standing currency issues:

1. The supply of bitcoin is limited to 21 million coins, meaning it will not be easily devalued.

2. Its global and digital-native nature means it can be transferred almost instantly, and at near-zero cost, on a global scale, surpassing the inherent frictions in transferring value across political boundaries that have existed for a long time.

3. Its decentralized and permissionless nature makes it the world's first truly open-access monetary system.

Despite the emergence of many other cryptocurrencies after Bitcoin's breakthrough, Bitcoin has been recognized globally as the most prominent asset in this field. This has given Bitcoin a unique position in the cryptocurrency space, making it a global alternative currency and a scarce and trusted asset.

The process of Bitcoin's market cap reaching 1 trillion US dollars.

Despite the significant increase in the price of Bitcoin and its widespread adoption, the prospects of it becoming a major store of value or payment asset remain uncertain. In the past decade, Bitcoin has performed exceptionally well for seven years, with an annualized return of over 100%, but it has also had three years of poor performance and experienced multiple significant corrections. These fluctuations demonstrate the potential of Bitcoin as a global alternative currency and the uncertainty in its development.

Macroeconomic variables and unrelated assets

Bitcoin is largely unrelated to other macroeconomic variables, so its long-term correlation with risk assets like stocks is low. Although its short-term correlation with the US real interest rate or liquidity can increase sharply during sudden changes, this correlation is typically temporary and not significant in the long term.

In the long term, the adoption trajectory of Bitcoin may be influenced by issues such as global monetary instability, geopolitical disharmony, the sustainability of US finances, and the stability of US politics. Due to its scarcity, non-sovereignty, and decentralized characteristics, Bitcoin has been considered a safe-haven asset by some investors during some of the most disruptive events globally in the past five years. In these events, Bitcoin sometimes experiences a brief negative feedback first, followed by a rebound, with possible reasons as follows:

1. Bitcoin trades 24 hours a day and can settle almost instantly as cash, making it a highly liquid asset, especially in times of tight liquidity in traditional markets, particularly over weekends.

2. The Bitcoin and crypto asset markets are still immature, and investors have a limited understanding of Bitcoin.

Usually, including the recent global market sell-off on August 5, 2024, Bitcoin often manages to recover to previous levels within a few days or weeks, and frequently continues to rise further as the market realizes the positive impact of these events on its fundamentals.

US Treasury Bonds Return to the Focus

With the increasing concerns about the federal deficit and debt both domestically and internationally, the attractiveness of potential alternative reserve assets has grown as a hedge against future events that may impact the US dollar. This situation has also occurred in other heavily indebted countries. According to our conversations with clients, this has been a major reason for the recent surge in institutional interest in Bitcoin.

Bitcoin remains a risky asset

Bitcoin itself is still a high-risk asset. It is an emerging technology and is still in the early stages of adoption on its path to becoming a global payment asset and store of value. Additionally, Bitcoin has been volatile and faces many risks including regulatory challenges, uncertainty in adoption path, and an immature ecosystem.

Conclusion

While Bitcoin may experience short-term volatility in line with other risky assets, its driving factors and characteristics are different, even opposite, from traditional assets. In the context of global geopolitical tensions, concerns about US debt and increased political instability, Bitcoin is seen as a unique investment choice to effectively hedge against various risks.

Editor/aaronye