Bitcoin is falling, but outperforming stocks and gold for the third straight year

Although Bitcoin is more than 30% below its all-time high (ATH) of $ 69,000 on November 10, it has emerged as one of the top performing assets of 2021, outperforming the US benchmark S&P 500 and gold.

Arcane research noted in report new that the annual performance of Bitcoin is close to 73%. Meanwhile, the S&P 500 is up 28% and gold is down 7% over the same period, marking the third year in a row that Bitcoin has outperformed both.

Bitcoin vs. S&P 500 vs. Gold in 2021 | Source: Arcane Research

The core factor behind Bitcoin’s bullish performance is rising inflation. In November this year, the US consumer price index (CPI) recorded the largest annual increase in four decades.

“Most economists do not see inflation rising in the short term, as consumer inflation expectations show for the coming year. With a return of 73% on inflation in 2021, Bitcoin has proven to be an excellent inflation hedge, ”the report said.

Inflation 2021: Real CPI vs. Expected CPI | Source: BLS, New York Fed

Institutional market share in Bitcoin is growing

Loose monetary policy and persistent high inflation fears have also led mainstream financial firms to launch crypto-powered investment vehicles for their wealthy customers in 2021. .

Arcane reported inflows of up to 140,000 BTC ($ 6.56 billion) in spot and futures Bitcoin exchange-traded funds (ETFs) and exchange-traded products (ETPs). This year you will receive physical support.

Bitcoin holds in ETF | Source: ByteTree, Arkane Research

This has attracted more Bitcoin to get into investment vehicles, underscoring the growing need for the cryptocurrency from institutional investors.

In contrast, gold-backed ETFs recorded outflows of $ 8.8 billion in 2021, according to a World Gold Council report released today in December this year.

Global gold-backed ETF flow | Source: World Gold Council

The volatility behind the outstanding performance?

However, Bitcoin’s outperformance in 2021 included periods of high volatility.

Many analysts believe that extreme price movements make Bitcoin an unsuitable asset for inflation. Leonard Kostovetsky, professor of finance at Boston University, repeated in post on his blog that there are 13 days in 2021 that Bitcoin price is moving more than 10% in the same direction.

“It seems strange to assume that someone who is worried about holding dollars because they lost 7% of its value in the last year should be comfortable holding bitcoin, which can (and often does) lose. That is worth it in just one day. “

Arcane also acknowledged that Bitcoin was more volatile than the S&P 500 in 2021, noting that the cryptocurrency “acts as a risk asset” as it amplifies stock market movements.

The researcher cited the VIX, a measure of volatility expectations based on S&P 500 index options, to illustrate the relationship between Bitcoin and the stock market. It found that bitcoin price has fallen recently whenever the VIX indices have skyrocketed, suggesting that institutional investors are viewing bitcoin as a risky asset.

Bitcoin vs. VIX | Source: Arcane Research, TradingView

Therefore, the likelihood that Bitcoin will continue to fall after a stock market correction also increases. Arcane also noted that the S&P 500’s drop in prices in 2022 could wipe out a large portion of Bitcoin’s profits.

“So keep an eye on the turmoil on the stock market in the coming year and its possible effects on the short-term Bitcoin price trend.”

However, Aristides Capital board member Chris Brown predicted Bitcoin’s demise in 2022. He said the cryptocurrency could face a massive sell-off before the Federal Reserve (Fed) ends its $ 120 billion monthly asset purchase program, followed by three rate hikes next year.

BTC / USD price chart versus the weekly frame of the Fed balance sheet | Source: TradingView

“If the Fed actually raises interest rates enough to make money less liquid, or if the market believes it, you will see certain speculative sectors, typically cryptocurrencies, collapse right now and generate no cash flow.”

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