Bitcoin Will Lead Recovery in Risk Assets When Sentiment Improves

© Reuters

By Yasin Ebrahim

Investing.com – Bitcoin has followed traditional risk assets like stocks lower recently amid jitters about impending action from the Federal Reserve, but when sentiment on risk assets flips positive BTC will lead the recovery.

BTC/USD rose 3.7% to $48,375.

"The [sell-off] in bitcoin is raising some questions on whether BTC and other cryptos are risk assets that will continue to correct the same way that equity markets do [at a time] when the Fed and other central banks are becoming less accommodative," Seamus Donoghue, VP Strategic Alliances at Metaco, said in a recent interview with Investing.com ahead of the Federal Reserve decision on Wednesday.

The Federal Reserve is expected to announce that it will reduce the pace of bond purchases on Wednesday, and forecast a sooner rather than later path to rate hikes.

The years of monetary policy easing from the Fed added significant liquidity in the various markets including cryptocurrencies, helping to prop up asset valuations.

But the removal of monetary policy accommodation from the Fed and other central banks will be short lived as officials will be weary of an ugly selloff in risk assets.

"There is so much leverage not just in crypto markets but more broadly in the system that any correction in risk assets will bring the central banks back to the table to ease again because I don't think the market can handle any real correction,"  Donoghue added.

"Crypto will lead the way out of any correction in broader risk asset."

Bitcoin's move lower recently in tandem with traditional risk assets like stocks has left some questioning why investors didn't turn to the BTC, which many have likened to ‘Gold 2.0,’ for protection.

Bitcoin, however, appears to be a victim of its own success as the influx of the institutional investors to the space has been flagged as one the reasons that the popular crypto is more correlated with traditional assets like stocks.

“When institutional investors are looking to raise liquidity, they sell whatever is most liquid first, making bitcoin much more correlated than three or four years ago when there was very little institutional presence and the asset was uncorrelated with traditional asset classes,” according to Donoghue.

Looking at the underlying plumbing in the bitcoin network, there also appears reason for optimism as the amount of BTC moving onto exchanges – typically a bearish indicator – is well below the prior major selloff during May to July, when BTC plunged to below $30,000 from nearly $60,000.

“In May-July, exchanges saw an enormous influx of some +168k BTC on net over a span of three months. In the current Oct-Dec correction, we have seen a total of 49k BTC flow out of exchanges, making for quite the contrast,” Glassnode said in its weekly report.