So much for protection against inflation: Bank of America considers Bitcoin to be a risk asset

Bitcoin viewed by investors as an inflation hedge
Bank of America examines correlation between BTC, stock markets and gold
High volatility makes Bitcoin a risky asset

A lot has happened in the field of cybercurrency since the development of Bitcoin as the world’s first cryptocurrency more than ten years ago. In addition to the creation of many other digital coins, the use of internet currencies has also changed. Because even if Bitcoin was originally conceived to guarantee limitless, decentralized payment transactions, it is now used by numerous investors more as a store of value and thus as an alternative to the proven safe haven of gold. This has become all the more important as inflation has been rising for months.

Finance professor Jeremy Siegel only announced in January that younger investors in particular would increasingly rely on Bitcoin to protect themselves against currency depreciation: “If we are honest, I think that gold has been replaced by Bitcoin in the minds of many younger investors as a protection against inflation Digital coins are the new gold for millennials,” Siegel said on CNBC’s Squawk Box.

Bank of America examines Bitcoin correlations

Bank of America sees it quite differently, as explained in a report available to Decrypt. The investment bank has looked at how the digital currency has correlated with the stock markets and its rival gold in recent times. The BoA found that the Bitcoin moved much more like a risk asset than as an inflation hedge. The correlation with the broad-based US index S&P 500 rose to an all-time high at the end of January. The correlation has also peaked compared to the NASDAQ 100 tech index: “Correlations on January 31 between Bitcoin and the S&P 500 (SPX) and between Bitcoin and the NASDAQ 100 (QQQ) have all-time highs and reached 99.73 percent.” .

Strong volatility

However, Bitcoin’s trend towards a risk asset would not have taken place in January. The report concludes that Bitcoin has been traded as a risk asset since July 2021. As a reminder: In July last year, Bitcoin initially lost value rapidly, but then quickly recovered and rose by around 50 percent. However, it is precisely this type of high volatility that characterizes a risk asset.

No investor should deny that the Bitcoin price is repeatedly exposed to massive fluctuations. Ultimately, the original cyber currency fell below $30,000 last year, only to set an all-time high of just under $69,000 a few months later.

Bitcoin and gold do not move in the same way

However, Bank of America has not only looked at the correlation with the US stock markets, but also with the precious metal gold. By contrast, this would have been almost zero at the end of January. Accordingly, bitcoin and gold did not move in a similar way at all. However, this was different at the beginning of the corona pandemic. The two asset classes would have moved in a very similar way, especially when the various international currency holders announced that they intended to adopt massive stimulus programs to support their respective economies.

Opportunities in less developed countries

However, as long as the volatility of the cryptocurrency remains so high, the US bank does not assume that the Bitcoin will be used in industrialized countries as an inflation hedge and lose its status as a risky asset. However, this could be different in less developed countries, which tend to be exposed to greater inflationary risks. For example in Turkey, where inflation jumped to almost 49 percent in January 2022. Investors are increasingly turning to cyber currency here: At the end of December 2021, the bitcoin price jumped to an all-time high, measured in Turkish lira, while BTC in US dollars was well below its high of late November.

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