Bitcoin & Crypto | Emerging Markets | FX
Bitcoin: A Bet on Reflation, Not the Dollar’s Demise
- By Bilal Hafeez
- 1 min read
Bitcoin is up almost 90% this year. Many crypto enthusiasts think this signals that bitcoin will replace the dollar in the global financial system. Yet it could also simply be a risk asset that has performed well in an environment of ample liquidity and increasing tech adoption. This could put bitcoin into a similar camp as top-performing NASDAQ companies like Chinese internet search company Baidu (up 57% this year), streaming device manufacturer Roku (up 41%) and Chinese video sharing company Bilibili (up 68%).
Moreover, if we look at the correlation between the level and changes in bitcoin and key macro markets, we find bitcoin is strongly correlated to near-term inflation expectations, Chinese stocks and tech stocks (Chart 1). So, it is moving with the strong reflation theme. Its correlation with commodity markets like oil and copper also shows this.
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Bitcoin is up almost 90% this year. Many crypto enthusiasts think this signals that bitcoin will replace the dollar in the global financial system. Yet it could also simply be a risk asset that has performed well in an environment of ample liquidity and increasing tech adoption. This could put bitcoin into a similar camp as top-performing NASDAQ companies like Chinese internet search company Baidu (up 57% this year), streaming device manufacturer Roku (up 41%) and Chinese video sharing company Bilibili (up 68%).
Moreover, if we look at the correlation between the level and changes in bitcoin and key macro markets, we find bitcoin is strongly correlated to near-term inflation expectations, Chinese stocks and tech stocks (Chart 1). So, it is moving with the strong reflation theme. Its correlation with commodity markets like oil and copper also shows this.
However, bitcoin’s correlation with the US curve and longer-term inflation expectations is weaker. This suggests that bitcoin is moving less with structural concerns around the US, whether inflation or fiscal risk. Moreover, the correlation with gold is weaker than other commodity markets, at least when looking at the level of prices rather than changes.
The bottom line is that the bitcoin rally is currently another expression of the reflation or risk-on trade rather than a vote against the dollar and the current financial system.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)