For investors who jumped on the cryptocurrency bandwagon last year, their speculation has proven to be painful and expensive. At Impact Capital, we view Bitcoin as nothing more than a speculative bet on liquidity. As we have mentioned previously (in January of this year and April 2021), we don’t believe investors need to have Bitcoin or cryptocurrencies in their portfolio. We hold to what we proclaimed last year: “…invest only what you can afford to lose.”
The Federal Reserve is set to reduce the size of its balance sheet, which is expected to reduce the liquidity in the economy (as we mentioned previously in February of this year). Investors were quick to act on this news and started selling the most speculative investments first. At the time of this blog’s publication, Bitcoin is down by 37% so far this year. Similarly, the previously high-flying iShares Russell 2000 Growth ETF is down by approximately 30%. To provide some context, the U.S. stock market (as measured by the S&P 500) is down by 18%.
What is even worse is that Bitcoin has become increasingly correlated with small growth stocks. The chart below illustrates the price of Bitcoin (green line), the price of the small-cap growth ETF (dark blue line), and the correlation (royal blue area chart) increasing as prices were falling.
If you are a stock investor, there has been no long-term benefit to holding Bitcoin. Investors may have thought Bitcoin would be a different type of investment than stocks, but it turns out stocks and Bitcoin share some of the same risks after all.
If you have any questions, please do not hesitate to contact your Impact Capital advisor.