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Crypto Adoption Might Not Lead to Rise in Token Value

Crypto is more correlated to macroeconomic factors than before according to Goldman Sachs.

The recent bear cycle in the crypto markets can be attributed to macroeconomic factors.

A note from Goldman Sachs analysts cited in a Bloomberg article claims that the correlation of crypto assets with other macro assets has increased. Therefore, the value of the former can be affected by macro assets, Goldman strategists Zach Pandl and Isabella Rosenberg asserted.

Macroeconomic Factors Affect the Price of Crypto

This correlation highlights the fact that “mainstream adoption can be a double-edged sword,” the strategists wrote. “While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

Thus, crypto cannot be seen as a hedge against fiat.

According to them, Bitcoin’s price has a positive correlation with proxies for consumer-price risk like breakeven inflation and crude oil as well as “frontier” technology stocks. But it has a negative correlation with real interest rates and the U.S. dollar.

In the recent past, the Federal Reserve and other central banks have resorted to a tight monetary policy. Consequently, real interest rates have risen, and currencies have appreciated.

This has hurt the value of cryptocurrencies which have witnessed a significant downturn in past 2 months. The market capitalization of cryptoverse plunged from more than $3 trillion at the peak in November to about $1.76 trillion.

“Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets,” the strategists said. “But these assets will not be immune to macroeconomic forces, including central bank monetary tightening.”

Capricious Stance of Goldman Sachs

Earlier this month, Goldman Sachs had said that Bitcoin could reach $100,000 this year by taking on Gold. If Bitcoin could grab a 50% market share of the store of value market in the next 5 years, its price could touch $100,000.

At that time, as per Goldman’s estimates, Bitcoin’s float-adjusted Market Capitalization stood at just under $700 billion, constituting 20% of the store of value market.

In just a matter of a few days, the investment bank has changed its stance.

Macroeconomic factors might have an impact on crypto markets, but how big is the impact cannot be determined by just a single bullish or bearish cycle. It could take years to find a pattern. In a financial market, each investor tries to maximize the returns. So, whichever asset provides a higher return may attract more investment. But Web3 is ushering in a new era not just for financial markets but also for the governance of corporations.

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