Goldman Sachs is projecting that Bitcoin and other cryptocurrencies will start to more closely mirror other financial assets as we get further into what the Fed intends to do with money this year.
Will Canny at Coindesk reports GS analysts say that crypto will “raise correlations with other financial market variables” and that coins will more attentively wax and wane according to greater market trends.
“Mainstream adoption can raise valuations but at the same time will also likely raise correlations with other financial market variables, which reduces the diversification benefits of holding digital assets,” writes Canny, citing an analyst report as the source for these ideas and projections. “The decline in bitcoin was highly correlated to the ‘drawdown in low-profitability tech stocks and recent IPOs,’ which reacted negatively to the Federal Reserve’s move toward interest-rate increases, the report said.”
Canny points out that volatility in crypto prices can have an effect on decentralized finance lending that’s similar to the chilling effect that certain changes have on traditional lending.
“Sharp falls in token prices resulted in liquidations and a decline in borrowing on decentralized finance (DeFi) platforms – which use coins as collateral – much like in the traditional financial system, the bank noted,” Canny writes. “Further development of blockchain technology, such as metaverse applications, may provide a ‘secular tailwind’ for certain digital assets over time, but they won’t be ‘immune to macroeconomic forces,’ such as monetary tightening by central banks, the report said.”
What does all of this mean to investors? For some, it’s good news, of a kind. These correlations, if they occur, might make Bitcoin or altcoin prices more predictable, which can give traders more assurance. We’ll see what shakes out in 2022. Meanwhile, keep an eye on developing coins like Cardano (ADA) and Litecoin (LTC) and the range of “Ethereum killers” that can handle smart contracts. Crypto is a swiftly moving target, and anything goes for 2022.