The iShares Bitcoin Trust ETF (IBIT 1.78%) tumbled 17.1% last month, according to data from S&P Global Market Intelligence. The exchange-traded fund launched earlier this year, and it's become a popular vehicle for people seeking Bitcoin exposure in their investment portfolio. Macroeconomic conditions created a favorable environment for the cryptocurrency during the first quarter, but those reversed in April.
NASDAQ: IBIT
Key Data Points
Bitcoin displays noteworthy correlations
Bitcoin has become a more popular asset class with broader acceptance among investors. That reputation shift is generally a force that stimulates demand, which helps Bitcoin holders. However, this legitimacy comes with consequences, such as exposure to the prevailing forces in global capital markets.
Image source: Getty Images.
In recent years, the prices of Bitcoin and other high-profile crypto assets have been highly correlated to other speculative assets. The chart below displays the five-year performance of Bitcoin and the ProShares Ultra QQQ ETF, which is a leveraged ETF that is meant to triple the daily performance of the Nasdaq Composite. Bitcoin and tech stocks are subject to shared market forces.
TQQQ Total Return Level data by YCharts
For much of the past five years, Bitcoin's price has behaved like that of a high-growth tech stock, except with even more volatility. Growth investors are apparently buying and selling this crypto asset as general risk tolerance rises and falls. It's no longer a niche community for supporters of the tech, and it's not behaving like a precious metal.
That relationship held true in April
Bitcoin's relationship with growth stocks continued in April, and the iShares Bitcoin ETF tumbled along with it.
Bitcoin Price data by YCharts
Interest rates might be the most important macroeconomic factor for the stock market right now. The Federal Reserve hiked interest rates in 2022 in an effort to combat price inflation. High rates discourage borrowing, which in turn discourages consumer spending, corporate growth investments, and hiring. Those conditions tend to curb investor risk tolerance because they introduce uncertainty. Businesses face a potential recession and weak growth prospects, making them less appealing to potential buyers. Rate hikes also increase the availability of higher yields from lower-risk assets, such as bonds. This discourages investors from buying riskier assets, and Bitcoin is among that group of riskier assets.
For more than a year now, investors have anticipated an end to the Fed's tight policy. The central bank is likely to slowly cut rates once inflation gets closer to its target rate. Last year's economic data led investors to expect a rate cut midway through 2024.
That optimism was dealt a blow in April with the arrival of the latest economic indicators. Inflation was higher than expected, while employment data was better than expected. The Fed is less likely to cut rates with strong employment and high inflation, so investors had to revise their expectations. It seems less likely that interest rates will fall soon. After a few positive months for growth stocks and cryptocurrencies, the latest sign of trouble prompted investors to sell and lock in some gains.
Bitcoin is subject to the downside potential associated with other popular risk assets, which was relevant last month. That shouldn't necessarily dissuade long-term investors, but they should anticipate more volatility moving forward.
