Can bitcoin act as money?

An analysis of bitcoin's ultimate credibility

Since 24 January, bitcoin has risen 65% and gold rose about 7% priced in US dollars. Before gold began its current successful but relatively modest leap into new high ground, there is little doubt that hedge funds and others sold down their Comex gold contracts and bought some bitcoin ETFs instead. The listing permissions for bitcoin ETFs made regulated investment possible. And attracted by the limitations of supply, an investment cohort moved in for the kill.

This raises the often debated question yet again as to whether BTC will become money, which is the long-stop argument of its supporters. For the avoidance of doubt, I approach this topic not as a goldbug insisting on an old-school argument. Defending bitcoin, Colonel Macgregor put it in a recent interview that Macleod has a vested interest as a gold bug. I maybe a gold bug, but that does not mean that I am one through bias. I try to look at all matters objectively, which is how I approach an examination of bitcoin without any bias against or in favour. But there are some factors that investors should bear in mind and that is what this posting is about.

I draw your attention to the correlation between BTC and US tech stocks, illustrated in the chart below.

I constructed the tech index by taking the weekly close of seven large-cap stocks, rebasing them all to 100 on 24 February 2020 and then taking the arithmetic average of all of them to construct an index. It is therefore a pure price index instead of the weighted by capitalisation approach. This is then compared with bitcoin’s (BTC) weekly closing price, similarly rebased. Since bitcoin has far higher volatility than even the tech stocks, I put them on different axes to facilitate visual comparison. The current bull markets in both tech stocks and bitcoin commenced at that same time.

The result is striking. Until early November 2021, the correlation was loose, though both were in bull phases. But remarkably, bull phases ended at the same time, and a bear phase ensued until both markets bottomed a year later in November 2022. The correlation in that correction was then much tighter, as it has been in the subsequent bull phase, particularly in recent months.

This begs the question: is bitcoin to be regarded as a new form of money, escaping from government currency debasement, or does it merely act as an investment or speculative substitute for tech stocks? This is important, because many hodlers[i] argue that the tech bubble is being fuelled by “money printing”, the very evil that justifies their hodling. But the reality is that by their actions they appear to be chasing profits as if they were punting in momentum-driven tech stocks, instead of genuinely hedging out of fiat currencies.