Bitcoin is well off the highs the cryptocurrency hit in 2021 and has recently dropped by 15% since hitting a 52-week high in July 2023 (see chart). The decline in bitcoin, considered one of the benchmarks of the cryptocurrency asset class, has weighed on other coins and proxies such as coin base. Bitcoin has struggled to gain traction as U.S. interest rates have climbed, and the dollar has gained traction. Until it's clear that central banks (other than the People's Bank of China) are likely to pause their rate hike cycle, Bitcoin will remain under pressure.
What is Bitcoin
Bitcoin is a decentralized digital currency created in 2009 by an anonymous person or group of individuals using Satoshi Nakamoto's pseudonym. It operates on a technology called blockchain, a transparent and secure ledger that records all Bitcoin transactions.
Unlike traditional fiat currencies, such as the U.S. dollar or Euro, Bitcoin is not controlled by any government or central authority. Instead, it is based on a peer-to-peer network, where transactions are facilitated directly between users without the need for intermediaries like banks.
Bitcoin has gained popularity for several reasons. It offers fast and low-cost transactions, particularly for international payments. Additionally, it allows individuals to have full control and ownership over their money without relying on third parties. This decentralized nature and the limited supply of bitcoins (there will only ever be 21 million) also contribute to its appeal.
Bitcoin is traded on various systems and platforms known as cryptocurrency exchanges. Some popular exchanges include Binance, Coinbase, Bitstamp, Kraken, and Huobi. These platforms allow users to buy and sell Bitcoin in exchange for currencies such as USD, EUR, or other cryptocurrencies. There are also decentralized exchanges (DEXs) where Bitcoin can be traded directly between individuals without a centralized authority. It's worth noting that the cryptocurrency landscape is constantly evolving, so it's a good practice to research and verify the latest information about the platforms where Bitcoin is traded.
Bitcoin's value can be highly volatile, and its price has experienced significant fluctuations. Some view it as an investment opportunity, while others use it as a transactional currency or a hedge against inflation. It has also inspired the development of thousands of other cryptocurrencies, collectively called altcoins.
What is an Altcoin
An altcoin, short for alternative coin, refers to any cryptocurrency other than Bitcoin. Bitcoin was introduced first and is a popular cryptocurrency. Atcoins emerged as alternative digital currencies with varying features, purposes, and technologies. Altcoins were introduced to address perceived limitations or offer different functionalities than Bitcoin. Examples of altcoins include Ethereum, Ripple, Litecoin, and many others. The altcoin market has grown significantly, providing users with diverse options for investing, trading, and utilizing cryptocurrencies.
What is an Equity Bitcoin Proxy?
A few equities are considered proxies to Bitcoin, meaning that they move in a similar direction to the price of Bitcoin. Remember that these equities are not directly tied to Bitcoin and can be influenced by other factors. Some examples of equities often mentioned as proxies to Bitcoin include Grayscale Bitcoin Trust, an investment trust that holds Bitcoin and allows investors to gain exposure to the price movements of Bitcoin indirectly.
MicroStrategy is a business intelligence company with significant investments in Bitcoin. Its stock price is known to correlate with the price of Bitcoin.
Coinbase is a cryptocurrency exchange platform. While Coinbase's stock price does not perfectly mirror Bitcoin's price, it is influenced by the overall sentiment and activity in the cryptocurrency market.
Square is a payment processing company that enables Bitcoin transactions through its Cash App. The adoption and popularity of Bitcoin can influence its stock price.
Equity proxies to Bitcoin are investments, such as stocks or funds, that aim to provide exposure to the price movements of Bitcoin without directly holding the cryptocurrency. While there may be some correlation between equity proxies and Bitcoin, it's important to note that the correlation is not always one-to-one or consistent. The correlation can vary based on market conditions, investor sentiment, and specific stocks or funds. It's always a good idea to conduct thorough research and consult with a financial advisor before making any investment decisions related to equity proxies or Bitcoin.
What is Correlation?
Correlation is a statistical measure that indicates the strength and direction of the relationship between two or more variables. It helps us understand how changes in one variable are associated with changes in another. Correlation is usually expressed as a value between -1 and 1, where -1 indicates a strong negative relationship, 1 indicates a strong positive relationship, and 0 indicates no relationship. A positive correlation means that as one variable increases, the other variable also tends to increase. In contrast, a negative correlation means that the other variable tends to decrease as one variable increases.
The Decline in Bitcoin has Come as the dollar has rallied
The decline in the Bitcoin exchange rate coincided with a Dollar forex rate rally. The rally in the greenback has occurred as the market has increased U.S. interest rates, pushing up the forward rate and the dollar index.
The value of the dollar can have an impact on Bitcoin, which is often seen as a hedge against traditional fiat currencies, including the U.S. dollar. When the dollar's value weakens, it can increase demand for alternative assets like Bitcoin. This is because some people view Bitcoin as a store of value and a potential haven during economic uncertainty. Factors such as market sentiment, regulatory developments, and global economic conditions can influence the Dollar's and Bitcoin's relationship.
Additionally, most of the traded bitcoins are transacted versus the U.S. dollar. Approximately 85% of the bitcoins traded are transacted against the dollar. Therefore, if the dollar's value moves higher, it can generate headwinds for bitcoin.
Why has the Dollar Rallied?
When U.S. interest rates rise, it frequently leads to an increase in the value of the U.S. dollar for several reasons. As interest rates rise, returns on investments denominated in the U.S. dollar also increase. This situation makes U.S. financial assets more attractive to investors seeking higher yields. Consequently, the demand for U.S. dollars increases, driving up its value.
Higher interest rates can attract foreign investors seeking better returns on their investments. These investors must convert their local currencies into U.S. dollars to invest in U.S. assets, creating additional demand for the U.S. dollar and further appreciation.
When interest rates rise in the United States but remain low or stable in other countries, it creates a divergence in monetary policy. This policy divergence can shift capital flows towards the higher-yielding U.S. dollar-denominated assets, strengthening the dollar.
The U.S. dollar is often considered a safe-haven currency, meaning investors tend to flock to it during periods of market uncertainty or economic turmoil. When U.S. interest rates rise, it can signal a more robust economy or a tightening of monetary policy, strengthening the perception of the U.S. dollar as a haven.
Why does a Decline in Bitcoin Impact Proxies like Coinbase?
Bitcoin significantly impacts Coinbase, one of the largest cryptocurrency exchanges. Coinbase was founded in 2012 and became famous for its user-friendly interface and convenient way to buy, sell, and store cryptocurrencies, including Bitcoin. As Bitcoin's popularity has grown, so has Coinbase's user base and trading volumes.
Bitcoin's impact on Coinbase can be seen in several ways. Bitcoin is the most widely traded cryptocurrency, and its price movements can significantly influence trading volumes on Coinbase. When Bitcoin experiences high volatility or rallies, trading activity on Coinbase often increases as users buy or sell Bitcoin.
Coinbase generates revenue from transaction fees and other services to its users. As Bitcoin's value and trading volume increase, so does Coinbase's revenue, as most Coinbase users engage in Bitcoin-related transactions.
Bitcoin's popularity has helped drive user adoption of Coinbase. Many people interested in buying or trading Bitcoin turn to Coinbase as their first entry point into the cryptocurrency world. Coinbase's user-friendly platform and trusted reputation have made it a popular choice, further boosted by Bitcoin's impact.
Bitcoin's performance and overall market sentiment can influence user behaviour on Coinbase. When Bitcoin experiences a bullish trend, more users may be inclined to buy cryptocurrencies, leading to increased activity on Coinbase. Conversely, some users might shift their focus away from trading during bearish periods for Bitcoin.
The Bottom Line
The upshot is that many equities used as proxies for Bitcoin have come under pressure as the cryptocurrency has declined. Many of these companies rely on Bitcoin trading and its popularity, and falling prices detract from market sentiment. The dollar has been a catalyst for the drop in Bitcoin value. As U.S. interest rates have increased, they have buoyed the dollar. Since most of the Bitcoin traded globally is against the dollar, the rally in the dollar has generated headwinds for Bitcoin.
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