Bitcoin increasingly acts like a mere tech stock

Bitcoin was conceived more than a decade ago as “digital gold,” a long-term store of value that would resist broader economic trends and provide a hedge against inflation.

But the drop in the price of bitcoin last month shows that this idea is far from reality. Instead, traders are increasingly treating cryptocurrency as just a speculative investment in technology.

Since the beginning of this year, bitcoin’s price movement has resembled that of the Nasdaq, a benchmark heavily influenced by tech stocks, according to an analysis by data firm Arcane Research.

This means that as the price of bitcoin dropped more than 25% in the past month to below $30,000 on Wednesday – less than half of its November peak –, the drop came almost tied with a broader collapse in tech stocks as investors grappled with higher interest rates and the Ukraine War.

The growing correlation helps explain why people who bought the cryptocurrency last year, hoping it would appreciate, have seen their investment plummet. While bitcoin has always been volatile, its growing resemblance to risky tech stocks clearly shows that its promise as a transformative asset has yet to be fulfilled.

“This delegitimizes the argument that bitcoin is like gold,” said Vetle Lunde, an analyst at Arcane. “The evidence points in favor of bitcoin being just a risky asset.”

Arcane Research assigned a numerical score between 1 and -1 to capture the price correlation between bitcoin and Nasdaq. A score of 1 indicated an exact correlation, meaning prices moved together, and a score of -1 represented an exact divergence.

Since January 1, the 30-day average of the bitcoin-Nasdaq score has approached 1, reaching 0.82 this week, the closest it has ever been to an exact 1-to-1 correlation. At the same time, the price movement of bitcoin diverged from fluctuations in the price of gold, the asset with which it was most frequently compared.

Convergence with Nasdaq has grown throughout the coronavirus pandemic, driven in part by institutional investors like hedge funds, endowments and family offices pouring money into the cryptocurrency market.

Unlike the idealists who promoted the initial enthusiasm for bitcoin in the 2010s, these professional traders are treating cryptocurrency as part of a larger portfolio of high-risk, high-return technology investments.

Some of them are under pressure to secure short-term returns for customers and are less ideologically committed to bitcoin’s long-term potential. And when they lose faith in the tech industry more broadly it affects their bitcoin business.

“Five years ago, the people who were into crypto were cryptographic people,” said Mike Boroughs, founder of blockchain investment fund Fortis Digital. “Now you have people across the whole range of risky assets. So when they get hit there, it affects their psychology.”

Stock market concerns — affected by challenging economic trends, including Russia’s invasion of Ukraine and historic levels of inflation — have especially manifested themselves in the drop in tech stocks this year. Meta, the company formerly known as Facebook, is down more than 40%. Netflix lost 70% of its value.

On Wednesday, shares of cryptocurrency exchange Coinbase tumbled 26% after reporting a drop in revenue and a loss of $430 million in the first quarter. The company’s shares are down more than 75% overall this year.

The Nasdaq is already in bearish territory, having ended Wednesday down 29% from its mid-November record. It was also in November that the price of bitcoin peaked at almost $70,000. The drop was a reality check for bitcoin evangelists.

“There was this undeniable belief in retail that bitcoin at the end of last year was a hedge against inflation — it was a safe haven, it would replace the dollar,” said Ed Moya, cryptocurrency analyst at trading company Oanda. “And what happened was that inflation started to get really ugly and bitcoin lost half its value.”

The prices of other cryptocurrencies were also crushed. The price of ether, the second most valuable cryptocurrency, has dropped by around 25% since early April to below $2,300. Others, such as solana and cardano, also suffered precipitous drops this year.

Bitcoin has recovered from big losses before, and its long-term growth remains impressive. Before the cryptocurrency price boom in the pandemic, its value hovered well below $10,000 (BRL 51,300 today). True believers, who call themselves bitcoin maximalists, remain adamant that cryptocurrency will eventually break its correlation to risky assets.

Michael Saylor, CEO of business intelligence firm MicroStrategy, has spent billions of dollars on bitcoin, amassing over 125,000 coins. As the price of bitcoin plummeted, the company’s shares have plummeted about 75% since November.

In an email, Saylor blamed “traders and technocrats” who do not appreciate bitcoin’s long-term potential to transform the global financial system.

“In the short term, the market will be dominated by those with less appreciation for the virtues of bitcoin,” he said. “In the long run, the maximalists will have got it right, because billions of people need this solution, and awareness spreads to millions every month.”