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But concerns remain that the cryptocurrency could fall harder than its traditional rivals in 2022 on the U.S. Federal Reserveâs increasingly hawkish tones.
Bitcoin (BTC) may be down over 30% from its record high of $69,000, but it has emerged as one of the best-performing financial assets in 2021. BTC has bested the United States benchmark index the S&P 500 and gold.
Arcane Research noted in its new report that Bitcoinâs year-to-date performance came out to be nearly 73%. In comparison, the S&P 500 index surged 28%, and gold dropped by 7% in the same period, which marks the third consecutive year that Bitcoin has outperformed the two.
Bitcoin vs. S&P 500 vs. gold in 2021. Source: Arcane Research, TradingView
At the core of Bitcoinâs extremely bullish performance was higher inflation. The U.S. consumer price index (CPI) logged its largest 12-month increase in four decades this November.
âMost economists didnât see the high inflation coming, as witnessed by the 1-year ahead consumer inflation expectations,â the Arcane report read, adding:
âWith its 73% gain in the highly inflationary 2021, Bitcoin has proven itself to be an excellent inflation hedge.â
Inflation 2021: Actual CPI vs. Expected CPI. Source: BLS, New York Fed
Bitcoin holdings grew among institutional investment vehicles
Loose monetary policies and a sustained fear of higher inflation also prompted mainstream financial houses to launch crypto-enabled investment vehicles for their rich clients in 2021.
Arcane reported an inflow of 140,000 BTC (~$6.56 billion) across spot- and future-based Bitcoin exchange-traded funds (ETF) and physically backed exchange-traded products this year.
Bitcoin exchange-traded fund holdings. Source: ByteTree, Arcane Research
That prompted more Bitcoin units to get absorbed into investment vehicles, underscoring a greater institutional demand for the cryptocurrency.
In contrast, gold-backed ETFs witnessed an outflow of $8.8 billion in 2021, according to the World Gold Councilâs report published this December.
Global gold-backed ETF flows. Source: World Gold Council
Volatility behind superior performance?
Nonetheless, Bitcoinâs relatively superior performance in 2021 has included periods of high volatility.
Many analysts believe that extreme price fluctuations keep Bitcoin from becoming an ideal inflation hedge. That includes Leonard Kostovetsky, a finance professor at Boston College, who recalled in his blog post that there have been 13 days in 2021 when BTCâs price has moved over 10% in one direction. He wrote:
âIt seems strange to think that a person who is worried about holding dollars because they lost 7% of their value over the last year would be comfortable holding Bitcoin which could (and often does) lose that much value in a single day.â
Arcane, too, recognized Bitcoin for having been more volatile than the S&P 500 in 2021, noting that the cryptocurrency âbehaved like a risk-on assetâ by merely amplifying the most significant stock market movements.
The researcher cited VIX, a measure of the expectation of volatility based on S&P 500 index options, to exemplify the relationship between Bitcoin and stock markets. It noted that BTCâs price fell hard whenever VIX readings spiked in recent times, underscoring that institutional traders viewed Bitcoin as a risk-on asset.
Bitcoin vs. VIX. Source: Arcane Research, TradingView
As a result, Bitcoinâs potential to fall harder in the wake of a stock market correction also became higher. Arcane also noted that a bearish 2022 for the S&P 500 may end up wiping a big portion of Bitcoinâs gains.
âTherefore, be aware of stock market headwinds in the next year and their possible implications for bitcoinâs short-term price trajectory,â it added.
Related:Â Arcane Research releases its crypto predictions for 2022
But Aristides Capital managing member Chris Brown went far in predicting an all-and-all Bitcoin doom in 2022. He stated that cryptocurrencies could face massive selloffs ahead as the U.S. Federal Reserve ends its $120-billion-a-month asset-purchasing program followed by three rate hikes next year.
BTC/USD weekly price chart vs. Federal Reserve balance sheet. Source: TradingViewÂ
âIf the Fed really does hike rates enough to make money considerably less loose, or if markets believe they will, you are going to see certain areas of speculation come to a screeching halt,â Brown said, adding:
âThe prime example of such asset speculation is cryptocurrency; here lies $2.64 trillion of âwealthâ that is backed by nothing and generates no cash flows.â
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.