According to a recent report from NYDIG, Bitcoin had a phenomenal first quarter, with prices rising 71.9%. This surge in price outstripped all other asset classes, despite US regulators seeking to tighten their grip on activity within the cryptocurrency space. Despite these regulatory efforts, a few factors contributed to Bitcoin’s impressive performance.
Firstly, there was the ongoing banking crisis that has plagued regional banks across the US. Although the usefulness of Bitcoin in risk-off market scenarios and inflationary environments is still hotly debated, there’s no doubt that Bitcoin shined during a time when faith in the traditional banking system was in question.
Moreover, Bitcoin’s strong performance was not unique. Stocks, bonds, gold, and commodities all rose, but none could come close to Bitcoin. This was likely due to a more favorable macroeconomic backdrop, with declining inflation and interest rate expectations, which reversed the headwind of 2022 and acted as a tailwind.
Secondly, the cyclical nature of Bitcoin prices was also a factor. Bitcoin’s reward halving is set to take place in just over a year, and this part of the cycle, following a sharp drop like the one experienced in 2022, is usually the start of another cyclical upturn.
The report noted that this was Bitcoin’s fourth-best first quarter ever, and historical analysis indicates that this is usually a good omen for the rest of the year. Bitcoin has never had a down year after a positive first quarter, and some of its best first quarters, such as those in 2011 and 2013, led to massive full-year returns. While it’s unlikely that Bitcoin will achieve returns of this magnitude again, strong first quarters have historically preceded even better returns.
The report also examined Bitcoin’s correlations with other assets. Bitcoin’s correlations with “risk-on” assets like US equities have steadily declined this quarter, while correlations with gold have increased in recent weeks. Bitcoin’s correlations with the US dollar remain negative but rose during the quarter. However, over the long term, Bitcoin’s average correlations with other asset classes remain extremely low.
The report suggests that Bitcoin’s heightened correlations were a new trend brought about by fiscal and monetary stimulus impulses in response to the Covid-19 health care crisis. As Bitcoin continues to be adopted into traditional portfolios, it makes sense that correlations would increase, but they will still remain low given that the asset is largely driven by idiosyncratic factors.
The report also looked at some of the events that shaped the quarter. In January, Ordinals launched a project that allows users to create non-fungible tokens (NFTs) natively on Bitcoin’s blockchain. The growth of Ordinals inscriptions has slowed somewhat since the initial craze, but the number of inscriptions has topped one million to date, and one of the premier NFT creators in the entire digital asset landscape, Yuga Labs (Bored Apes Yacht Club, Crypto Punks), launched a collection, Twelvefold, using Ordinals. This sparked an important philosophical discussion on how Bitcoin’s blockchain should be used.
Financial purists advocate for the use of Bitcoin for the transmission and storage of value, while those with more expansive views advocate for Bitcoin’s use as a data storage layer. Regardless of which camp one falls into, the net beneficiary of the growth in inscriptions has been miners, who are paid transaction fees based on the amount of data transmitted.
Finally, the report notes that the banking crisis was a boon for Bitcoin. The takeover, wind down, or emergency sale of several banks in the traditional banking sector has highlighted a liquidity issue, losses on the asset side sustained in a rising rate environment, and a skittish and concentrated deposit base.
Read more:
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