Less than a month into this dazzling new year i.e. 2023, and the markets are heating up.
inflation has eased Significantly in the last few months. The slide in the markets throughout the past year has given investors hope that the Federal Reserve will move on its dovish interest rate policy sooner than before.
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It’s been almost a year since the economy transitioned to this new interest rate paradigm, with rates rising from zero to north of 4% and counting.
Inflation is coming down, markets have opened
Rates were the weapon of choice in the fight against the worst inflationary crisis since the 1970s. As the CPI numbers got hotter and hotter, it became clear that there was a big problem, The Fed knew this, and it didn’t hang around – kicking into gear one of the faster hiking cycles we’ve ever seen.
It has worked. Finally. Inflation has started coming down.
In fact, the main fear now is that the tightening cycle has gone too far, with concerns that a recession is coming Inflation is not the main reason for the hesitation in the market.
Ironically, if you need proof that inflation is coming down, all you have to do is look at how far cryptocurrency prices are rising – this is almost as indicative as the CPI report itself.
I say ironically because cryptocurrency, or more specifically bitcoin, was previously touted as an inflation hedge. Its tight supply is programmed so as not to leak, unlike its Fiat counterparts, went the theory.
Of course, nothing was further from the truth. The USD may have lost 10% to inflation over the past year, but Bitcoin 75% lost. go figure.
Now, with inflation easing, bitcoin (btc-usd) is off to the races again. It’s up 38% on the year, trading at $23,000 after a brutal year. This is the strongest rally for the sector in 9 months.
It continues to trade like a high-risk asset, as it has been doing for a long time, so it is benefiting more from expectations of derailing the dovish monetary cycle.
Below it is plotted against the Nasdaq (ixic), the tech-heavy stock index, its correlated yet less volatile cousin, is starting the year well, up 8%. It peels back to 33% in 2022.
Bitcoin is the Best Performing Asset Class of 2023
In fact, in Goldman Sachs’ year-to-date report this week, it even announced that bitcoin is the best performing asset class ever. It calculated the Sharpe ratio of different asset classes, which means it plotted the price increase against the volatility of each asset class.
Obviously, this is just a 25-day sample, but after a year from Hell last year, the relief is a major win for crypto investors.
However, it’s important to remember why. There is no underlying positive news coming from the industry this year that justifies the 40% pump in prices. In fact, the news cycle has been pretty negative. Crypto lender Genesis filed for bankruptcy, while rumors continue to swirl around Gemini, more layoffs are on the way coinbaseCrypto.com and a host of other crypto companies.
But as we know by now, bitcoin trades like a highly risky asset. And with inflation expected to come down and the Fed pivoting, that means it’s about to go up. Just don’t call it inflation protection.
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