Analysts at JP Morgan have argued against Bitcoin’s (BTC) value proposition as a competitor to gold, saying the largest crypto by market capitalization is not a suitable hedge during periods of market uncertainty.
Bitcoin is Least Reliable as a Hedge During Market Crunches
According to Bloomberg, JP Morgan strategists John Normand and Federico Manicardi have issued a report classifying Bitcoin more as a risk-on asset than as a hedge against market uncertainties. As part of their analysis, the due remarked that BTC was the “least reliable hedge” in periods of severe market drawdowns.
Back in mid-March 2020, during the Black Thursday market crash, panic over the coronavirus pandemic saw a massive liquidation haze overcome the financial market. Bitcoin and cryptos, in general, were not excluded, with the market shedding about 50% of its value.
However, Bitcoin quickly rebounded from the decline that bottomed out at the $3,800 level and was already above $5,000 barely a few days later. Indeed, BTC ended 2020 almost six-fold up from its Black Thursday bottom.
As part of their report, the JP Morgan analysts maintained that Bitcoin had a low correlation with hedges over the last five years. Well, gold, traditionally ascribed to the hedge asset status, is up a meager 70% over the last five years. Meanwhile, Bitcoin is up almost 7,000% within the same period.
Gold also dipped heavily during the March 2020 market crash. The precious metal did post a significant recovery but ended up experiencing massive volatility in the latter part of the year.
Wall Street is Running BTC
Apart from arguing against Bitcoin being classified as a hedge asset, the JP Morgan strategists opined that Wall Street was currently running BTC. Thus, the cryptocurrency has now moved into the realm of cyclical assets.
An excerpt from their report reads:
“The mainstreaming of crypto ownership is raising correlations with cyclical assets, potentially converting them from insurance to leverage.”
Indeed, 2020 heralded the long sought after institutional herd with many big-money players adopting Bitcoin. Publicly-listed firms like MicroStrategy added BTC to their balance sheets, with insurance firms and hedge funds joining the trend.
Bitcoin is currently experiencing a price retrace, being down about 8% over the last 24-hour trading period. The current decline also wiped out $900 million in over-leveraged longs as the total crypto market capitalization has also shed over $100 billion.