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For a little over two months, I’ve continuously said “Bitcoin will diverge” on X and in media appearances.
To be clear, no, I did not turn into some Bitcoin (BTC-USD) maxi. All throughout 2021 I loudly argued that Bitcoin 1) isn’t a hedge to inflation, and 2) isn’t a store of value. Clearly the last two years prove Bitcoin is not an inflation hedge. And the “store of value” argument is a clever marketing phrase. Something that has tail risk (right or left) that is UNPREDICTABLE day to day and can move in extreme ways is NOT a store of value. It’s an investment that has risk and must be sized appropriately.
The one thing I do agree with when it comes to Bitcoin is that it’s a hedge to counterparty risk – just like gold. If the source of risk-off sentiment is counterparty risk, such as during the regional banking crisis earlier in 2023, then Bitcoin CAN act like a risk-off trade. Bitcoin CAN diverge as a risk-on proxy from a correlation perspective.
Obviously, the most recent surge is on the Bitcoin ETF news. While I’ve been right on “Bitcoin diverging,” there’s a problem now.
Why Bitcoin’s Price Surge Is Bad News
I’ve done a number of podcasts with crypto enthusiasts and am on board with the idea that Bitcoin “isn’t crypto.” There are a lot of “crypto projects” which have no use case, are scams, and have no real investment purpose other than being pump-and-dump schemes. The problem I have now is that this rally in Bitcoin is causing many of these shitcoins to run harder. To many this is to be expected. Why? Because of co-movement. As BTC rallies, it drags the entire crypto space higher.
This is not what I meant when I said BTC would diverge. This is more like the old playbook of Bitcoin as a risk-on play. This makes me concerned that the move will NOT stick – that it’s largely a temporary return of speculative behavior. That’s NOT what you want to see as Bitcoin enthusiast.
This makes me hesitant to believe Bitcoin will continue to diverge if the recent movement resyncs correlations back to the Nasdaq.
Again, I recognize it’s just a day, and I maintain that we are in a very high-risk juncture for risk-on assets. If the credit event is underway, and tail risk in equities remains, the key will be how Bitcoin behaves on a relative basis separate from the most recent move.
Either way, I’d like to see shitcoins diverge from Bitcoin after this speculative surge. Bitcoin needs to diverge from other crypto to potentially be seen as a viable risk-off alternative.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
