Most traditional investors view bitcoin as a risk-on asset right now, confirmed by bitcoin’s current high correlation to the S&P 500 

by NUR HANANI AZMAN / pic by BLOOMBERG

THE cryptocurrency market continued to experience bearish sentiment in the new year amid expectations of quantitative tightening and hawkish monetary regulations from the US Federal Reserve (Fed). 

“Most traditional investors view bitcoin as a risk-on asset right now, confirmed by bitcoin’s current high correlation to the S&P 500. Risk-on assets tend to not perform well in periods of quantitative tightening. 

“Therefore, the most critical factor for the crypto market going forward is whether the Fed will initiate more hawkish monetary policies or not,” Luno, Arcane Research, a cryptocurrency data intelligence platform, and The Fed Minutes stated in a report. 

Luno Malaysia country manager Aaron Tang said the market has witnessed another week of less than favourable momentum as broader macroeconomic uncertainty impacted the cryptocurrency market. 

He said on Jan 5, bitcoin’s price fell by 4.5% following the release of the Fed’s December meeting minutes in which the US central bank indicated that quantitative tightening could be on its way. 

“Most traditional investors view bitcoin as a risk-on asset, which tends to not perform well in periods of contractionary monetary policy. Therefore, the most critical factor for the cryptocurrency market going forward is whether the Fed will initiate more hawkish economic policies or not. 

“Additionally, many made the mistake of blaming bitcoin’s falling price on Kazakhstan’s Internet shutdown, but it was the afore-mentioned Fed statement that caused bitcoin’s price to plunge,” he said about the report.

Tang said on a similar note, the days of greed in the crypto market are long-gone as The Fear and Greed Index has stayed below the greed level for almost three months. As investors hoped for a less fearful start to 2022, the Fear and Greed Index dipped down to 10 — its most fearful level in six months. 

“Separately, ProShares Bitcoin Strategy exchange-traded fund (ETF), the first bitcoin-linked exchange-traded fund, now holds less than 5,000 Chicago Mercantile Exchange futures contracts for the first time since November, and its asset under management has reached its lowest level since October 19, 2021, signalling dwindling interest for bitcoin exposure through futures-based ETFs.” he added. 

Kazakhstan’s bitcoin miners were forced offline as the Kazakh government shut down the Internet amid massive protests in the country — leading to a significant drop in the bitcoin hashrate. 

The bitcoin network lost around 12% of its hashrate as the Kazakh miners were forced offline, leading several media outlets to question bitcoin’s vulnerability to “world-events”. 

“We believe that bitcoin is probably the asset in the world that is the least vulnerable to country risk since bitcoin’s infrastructure and users are spread around the whole world. 

“Lost Bitcoin hashrate in one country means mining becomes more profitable elsewhere, incentivizing miners in other jurisdictions to increase their hashrate. This game theory is part of what makes the bitcoin network the most robust computing network globally,” according to the report. 

The bitcoin network went through a much larger “stress test” last summer when China banned mining, leading to an almost 50% drop in hashrate in just a few weeks. Even though the hashrate plummeted, the bitcoin Network continued to process transactions and secure users’ funds, just like it has done for 13 years now. 

Nevertheless, it’s still crucial that the bitcoin mining network is geographically diversified. After China banned mining, the US has emerged as the biggest bitcoin mining country with almost 40% of the total hashrate. If too much hashrate is concentrated in one country, it can be a long-term risk factor for the bitcoin network.