Bitcoin
Why did the iShares Bitcoin Trust fall 17% in April?
O iShares Bitcoin Trust ETF (I BITE -1.53%) fell 17.1% last month, according to data from S&P Global Market Intelligence. The exchange-traded fund launched earlier this year and has become a popular vehicle for people looking Bitcoin exposure in your investment portfolio. Macroeconomic conditions created a favorable environment for cryptocurrency during the first quarter, but reversed in April.
Bitcoin Displays Remarkable Correlations
Bitcoin has become a more popular asset class with wider acceptance among investors. This change in reputation is generally a force that stimulates demand, which helps Bitcoin holders. However, this legitimacy comes with consequences, such as exposure to prevailing forces in global capital markets.
Image source: Getty Images.
In recent years, the prices of Bitcoin and other high-profile crypto assets have been highly correlated with other speculative assets. The chart below shows Bitcoin’s performance over five years and the ProShares Ultra QQQ ETFwhich is a Leveraged ETF which aims to triple the daily performance of the Nasdaq Composite. Bitcoin and technology stocks are subject to shared market forces.
Total return level TQQQ given by Y Charts
For much of the past five years, Bitcoin’s price has behaved like that of a high-growth technology stock, except with even more volatility. Apparently, growth investors are buying and selling this crypto asset as general risk tolerance rises and falls. It is no longer a niche community for technology supporters and it is not behaving like a precious metal.
This relationship remained true in April
Bitcoin’s relationship with growth stocks continued into April, and the iShares Bitcoin ETF fell along with it.
Bitcoin Price given by Y Charts
Interest rates may be the most important macroeconomic factor for the stock market right now. The Federal Reserve raised interest rates in 2022 in an effort to combat price inflation. High rates discourage borrowing, which in turn discourages consumer spending, business growth investments and hiring. These conditions tend to reduce investors’ risk tolerance because they introduce uncertainty. Companies face a potential recession and weak growth prospects, which makes them less attractive to potential buyers. Rate increases also increase the availability of higher yields from lower risk assets such as titles. This discourages investors from buying riskier assets, and Bitcoin is among this group of riskier assets.
Investors have been anticipating an end to the Fed’s restrictive policy for more than a year. The central bank is likely to slowly cut rates as inflation approaches its target rate. Last year’s economic data led investors to expect a rate cut in mid-2024.
This optimism suffered a blow in April with the arrival of the latest economic indicators. Inflation was higher than expected, while employment data was better than expected. The Fed is less likely to cut rates with strong employment and high inflation, so investors have had to revise their expectations. It seems less likely that interest rates will fall soon. After a positive few months for growth stocks and cryptocurrencies, the latest sign of trouble prompted investors to sell and take some gains.
Bitcoin is subject to the downside potential associated with other popular risk assets, which was relevant last month. This shouldn’t necessarily deter long-term investors, but they should anticipate more volatility in the future.
Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Bitcoin. The motley fool has a disclosure policy.