Bitcoin (BTC) and the Changing Correlation with Traditional Markets

The recent unfounded rumors regarding Binance, coupled with Bitcoin’s successful defense of the $28,000 support, have contributed to the currency’s strength. However, there is an interesting development to note: BTC is becoming less correlated to traditional markets after the U.S. Federal Reserve elected to provide emergency liquidity to banks. This change in attitude from the central bank has caused a shift in the trajectory of US Treasuries as traders sought refuge from the inflationary upward pressure. Bitcoin appears to be agnostic to the movement and its price has been hovering around $28,000 for the past week.

Bitcoin (BTC) and the Changing Correlation with Traditional Markets

Bitcoin’s recent resilience has surprised some investors, especially in light of the bearish sentiment that has been prevalent in the market. The currency’s successful defense of the $28,000 support and its agnosticism towards the shift in the trajectory of US Treasuries have been significant developments. This article will explore these factors and their implications for Bitcoin.

BTC is Becoming Less Correlated to Traditional Markets

Bitcoin’s lack of correlation with traditional markets is a significant development that has been observed recently. This is because the U.S. Federal Reserve has elected to provide emergency liquidity to banks, causing a shift in the trajectory of US Treasuries as traders sought refuge from the inflationary upward pressure. Bitcoin appears to be agnostic to the movement and its price has been hovering around $28,000 for the past week.

U.S. Federal Reserve’s Backstop Lending Program

The $152.6 billion in outstanding borrowings from the U.S. Federal Reserve’s backstop lending program has been a driving factor in this shift in attitude from the central bank. The general public’s lack of trust in banks has also caused them to reconsider what the Federal Deposit Insurance Corporation (FDIC) is and how the Fed no longer controls the inflation trajectory.

Bitcoin’s Role as a Reliable Store of Value

The question of whether Bitcoin can serve as a reliable store of value during a crisis remains open. However, the 70% year-to-date gains certainly demonstrate a point. Investors are reducing their cash positions, and according to data from Bank of America, the total assets of money market funds in the United States reached a record high of $5.1 trillion. These instruments invest in short-term debt securities such as the U.S. Treasuries, certificates of deposit, and commercial paper.

Money Market Funds Offer Higher Returns

Fund manager and analyst Genevieve Roch-Decter, CFA, states that investors have withdrawn $1 trillion from banks because money market funds offer a much higher return. The 25% skew ratio is currently at -5 because protective put options are trading slightly cheaper than neutral-to-bullish calls. That is a bullish indicator given the recent FUD generated after CFTC sued Binance on March 27. The regulator alleges that Binance and CZ violated regulatory compliance and derivatives laws by offering trading to US customers without registering with market regulators.

Uncertainty Surrounding Major Crypto Exchanges

Bitcoin has held up well as the baking sector forced the Fed to reverse its credit-tightening policy. However, as long as regulatory uncertainty surrounds major crypto exchanges, Bitcoin is unlikely to break above $30,000.

Potential Risks

Even though Bitcoin investors view cryptocurrencies as a safe haven against inflation, a recession would reduce demand for goods and services, resulting in deflation. The risk increased substantially after the March U.S. ISM Purchasing Managers Index data was released. At 46.3, the indicator reached its lowest level since May 2020, below analysts’ forecast of 47.5, indicating contraction. According to Jim Bianco,position, it’s also essential to conduct thorough research before making any investment decisions.

Conclusion

In conclusion, Bitcoin’s recent performance suggests that it is becoming less correlated to traditional financial markets. The U.S. Federal Reserve’s recent shift in attitude has caused a shift in the trajectory of US Treasuries, with investors seeking refuge from the inflationary upward pressure. Bitcoin appears to be largely agnostic to this movement and has held steady around $28,000. Investors are also turning to money market funds for higher returns, reducing their cash positions and withdrawing a total of $1 trillion from banks. This trend is likely to continue as long as the traditional financial system fails to provide competitive returns. However, regulatory uncertainty remains a major issue for the cryptocurrency market, and Bitcoin is unlikely to break above $30,000 until this uncertainty is resolved. Investors will be wary of investing in a market that is subject to sudden regulatory changes and could potentially face significant losses.

FAQs

Q1. Is Bitcoin a safe investment?

A1: Every investment carries risks, including Bitcoin. It’s important to conduct thorough research and seek professional advice before investing in Bitcoin.

Q2. Can Bitcoin be used as a reliable store of value during a crisis?

A1. The question remains open, but the 70% year-to-date gains certainly demonstrate its potential as a store of value.

Q3. How has the recent market turbulence affected Bitcoin’s price?

A3. Bitcoin’s price has been hovering around $28,000 for the past week, demonstrating its resilience to the recent market turbulence.

Q4. What are money market funds?

A4. Money market funds invest in short-term debt securities such as US Treasuries, certificates of deposit, and commercial paper.

Q5. Should investors be cautious when investing in Bitcoin?

A5. Yes, investors should conduct their due diligence and seek professional advice before investing in Bitcoin or any other digital asset.

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