Goldman Sachs Explains Why Bitcoin Is Extremely Vulnerable To Rate Rises
Reaching the mainstream was the ultimate goal of the Bitcoin community, but increasing its correlation with traditional assets is an ugly drawback
While the idea of reaching mainstream adoption has always appealed to the cryptocurrency community, it has some drawbacks.
In a recent research paper, a group of Goldman Sachs analysts led by Zach Pandl writes that the increasing presence of the flagship cryptocurrency in the traditional financial sector has made it increasingly susceptible to macroeconomic factors. This means that the crypto market is now tied to the Federal Reserve’s monetary policy, which reduces the asset’s perceived diversification properties.
Earlier this month, the correlation between Bitcoin and the Nasdaq Composite index hit a new all-time high, with both cryptocurrencies and stocks experiencing major sell-offs. The analysts attribute this phenomenon to the growing mainstream adoption of cryptocurrencies:
Over the past two years, as Bitcoin has seen wider mainstream adoption, its correlation with macro assets has improved.
As Goldman points out, Bitcoin and other cryptocurrencies are “not immune” to the Fed’s quantitative tightening policy.
As reported by U.Today, the Fed has indicated that it will raise its short-term benchmark for the first time in March, after years of extremely accommodative monetary policy. The CNBC Fed Survey predicts that the central bank is expected to raise interest rates at least three times this year.
Goldman predicts that the Fed will hike rates at least four times this year, while some traders are bracing for as many as five rate hikes. Of course, this doesn’t bode well for asset prices.
It’s been more than three years since the last hike in December 2018. The Fed had hiked interest rates nine times in the three-year period from December 2015 to December 2018.