When I first got into bitcoin in 2016, one of the most appealing aspects was its non-correlation with the stock market.
It didn’t matter if the market was up or down. Bitcoin had no trading relationship with stocks.
In fact, bitcoin had absolutely nothing to do with the standard business cycle by which all other financial assets live and die. Over the last two years, that changed…
Today bitcoin strongly correlates to the Nasdaq. So if the Nasdaq goes up, bitcoin goes up, and vice versa.
That might seem odd to longtime crypto holders… but it’s all thanks to a new type of buyer in the marketplace: Institutions.
Institutions view bitcoin as a high-risk trading asset. Nothing more. Nothing less. They couldn’t care less about the blockchain’s immutability, its 21 million hard cap on new coin issuance, or its decentralized design.
They view it like a tech stock with no earnings that experiences periods of high volatility. In finance, we call these types of investments “risk-on” assets.
And every institution has rules that govern when and how much money they allocate to them.
They use financial models to tell them how much money they should allocate to risk-on assets. And those models change the allocation based on the prevailing interest rates.
They typically use the rate on the 10-year U.S. Treasury… what’s called the “risk-free” rate.
If the risk-free rate of return is higher, they’ll move away from what they view as high-risk investments… like bitcoin and high-growth tech stocks… and move into safe blue-chips that have earnings, predictable cash flows, dividends, and a measure of inflation protection.
That’s what’s happening right now.
We’re dealing with institutions that are relatively new to crypto… So they haven’t been in the asset long enough to understand what gives it value.
When they look at bitcoin, they see it as a trading asset… not a long-term investment.
We know bitcoin is a way to transmit value without a bank or middleman… it’s a monetary system run by a set of rules… And a long-term store of value that nobody can manipulate, control, or dilute.
But again, institutions don’t care about that…
For them, it’s like trading gasoline futures or the dollar versus the yen… They only care about the volatility and will go short or long to play it.
So when they change their allocations, it impacts not only bitcoin but also the tech space.
We know that’s true because when the market priced in a Fed pivot or pause on interest rates two weeks ago, the S&P 500 went up 5%, the Nasdaq rose more than 5%, and bitcoin went up 20%.
These major moves happened because their allocation models changed… But when core inflation came in much hotter than expected, all their allocation models said sell, sell, sell.
Now, I know it’s hard to watch bitcoin yo-yo around $20,000 like it has… especially after hitting an all-time high of nearly $68,000 last November.
But if you’ve followed my advice, you know we’re not in bitcoin to trade it… and that the volatility is the price we pay for life-changing gains.
Does My Optimism Make Me a Bitcoin Pollyanna
I dislike that bitcoin has become correlated to what the Federal Reserve does… But I recognize that’s the cycle we’re in because we’ve seen it before.
In 2016, bitcoin was highly correlated to what the People’s Bank of China said about bitcoin mining.
At the time, I thought, “Mining is highly mobile. Whether they shut down mining or not, it’s not the end of bitcoin.” But the market didn’t believe that.
When the People’s Bank of China came out with anything remotely negative about bitcoin, prices took it on the chin…
Any time People’s Bank said anything remotely positive or neutral about bitcoin, it would soar…
But today, people don’t care what the People’s Bank of China says about bitcoin.
In fact, bitcoin’s price went higher after China shut down bitcoin mining in 2021… the miners simply moved their operations to the U.S. and kept mining bitcoin.
So I see this current correlation between bitcoin and tech stocks – or bitcoin and Fed policy – as another situation like that.
It’s a temporary correlation… And as the market matures in its understanding of bitcoin and its value, that correlation will change.
How long are we going to be in that process? How long are we going to be beholden to interest rates?
No one can say for sure, but it will probably last until the next halving in 2024.
So you must understand where interest rates will go and what they will look like. Because it’ll help insulate you mentally and emotionally when we see more volatility.
That said, Fed Chair Jerome Powell has been very clear: He wants to kill inflation.
It won’t be like 1979 or 1980 when they took interest rates to 20%, but they will go up further from here… Powell tells us he is targeting 4.6%. Don’t be surprised if he goes to 5%.
That will definitely drive more fear and sell-offs… which means we’ll continue to see bitcoin buying opportunities.
Now, why do I say that? Am I just a Pollyanna who always thinks the pullbacks are a buying opportunity? No, not at all.
I’m a bitcoin realist.
A Tsunami of Cash Is Coming to Crypto
Earlier this year, I was very cautious. We didn’t know how bad the sell-off would be because we didn’t know how much money was overleveraged into crypto.
But with BlackRock – the world’s largest asset manager – coming into crypto, I’m now optimistic.
BlackRock’s institutional clients collectively manage $40 trillion… and BlackRock’s recent partnership with Coinbase means it will be easier than ever to onboard those clients into crypto.
Conservatively, that’s tens of billions of institutional dollars pouring into the space in the years ahead… And when the Federal Reserve signals it’s done raising interest rates, that flood of cash will become a tsunami.
When that day happens, it will be the bottom in equities… the bottom in growth stocks… and the bottom in bitcoin.
Is that wishful thinking on my part? No. I’ve based it on navigating countless interest rate cycles since 1989.
When the Fed stops raising rates… and institutions finally understand bitcoin and stop trading it like a tech stock… I believe that tsunami of cash will ultimately send bitcoin to $500,000 or more.
Let the Game Come to You!
P.S. As we saw last Wednesday, the Fed is moving full speed ahead with its plan to raise interest rates… and that means finding investments that beat inflation no matter where rates go from here.
So last week, I took that idea to the next level…
During my first LIVE online crypto event of the year, I showed viewers how five small $250 crypto investments could potentially return as much as $11,060 of monthly income.
In fact, it’s a proven strategy we’ve used twice before.
The first time it returned nearly $3,500 per month… and the second time, we used this strategy for a monthly return of about $11,060.
Thanks to the Fed, we have a third opportunity in front of us today.
You can watch a replay of my event right here… But do it soon. It won’t be online for long.