Cryptos Gained in Q1 Despite Weakened Asset Class Perceptions

It’s been an eventful start to 2023, with what feels like a full year of news crammed into just three months. Year-to-date cryptocurrency returns, similarly, have been much bigger than is typical for a single quarter:

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Traditional finance (TradFi) stock indexes

Crypto stocks

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The top-performing digital assets (among those with market capitalizations of $1 billion or more) were the tokens associated with Stacks (STX), Aptos (APT) and Immutable X (IMX), which increased 443%, 268% and 213%, respectively. Among decentralized finance (DeFi) tokens with $100 million+ market caps, the top performers were Liquity’s LQTY, Trader Joe’s JOE and Injective Protocol’s INJ – which all surged at least 230%.

Bottom line: Digital assets have roundly beaten TradFi assets this quarter.

Those two worlds, in other words, have decoupled. This quarter, the correlation between bitcoin (BTC) and the S&P 500 declined from 0.91 to 0.59, and got as low as 0.01 on March 22. (A correlation of 1 means the price of two things is moving in lockstep, while minus 1 means a perfectly inverse relationship. Zero means no link at all.) In other words, digital assets have behaved as the diversifying, uncorrelated asset that many investors crave.

What is amazing about that, though, is these gigantic returns have coincided with a dramatic worsening of perceptions about cryptocurrencies as the U.S. government cracks down on the industry. Instead of being viewed as another asset class that fits within an overall portfolio, crypto is often viewed as a problematic asset linked to fraud and market manipulation.

If you want some insight into the prevailing government/regulatory view of crypto assets, I would invite you to read Chapter 8 of the most recent “Economic Report of the President.” On one hand, the dedication of an entire 36-page chapter to cryptocurrencies highlights digital assets’ rapid ascent. On the other, the tone of the report shows the regulatory hurdles that may be ahead.

While acknowledging the innovation of blockchain technology, the report largely labeled cryptocurrencies as holding no fundamental value, offering no alternative to fiat currencies and existing for the purpose of speculation only. I would offer that this is an extremely U.S.-centric point of view for a global asset.

Residents of countries with sky-high inflation and less-credible central banks arguably place significant value on obtaining an asset with a fixed supply. And an asset with global value likely has value within the U.S. as well.

The main macroeconomic issue for investors (in crypto or otherwise) remains inflation, and that is likely to continue for the immediate future. M2 money supply (a preferred inflation gauge of mine) is down 1.7% from a year ago. It’s good to see it falling, but it remains 38% higher than pre-coronavirus pandemic levels. The Federal Open Market Committee has responded by raising interest rates at the most rapid rate in history in an attempt to quell the increase in prices.

A recent issue that caught my eye was the federal government balance sheet has actually increased by 2.6% this quarter – including a 5% rise over the last week – as the U.S. helps rescue banks. This runs in stark contrast to the Federal Reserve’s previously announced effort to shrink the size of the balance sheet. Fed Chair Jerome Powell indicated the recent increase is temporary lending to banks and not intended to alter the stance of monetary policy.

This past quarter also saw BTC hit a few notable technical signals. It warrants taking a look at how they ultimately panned out.

All in all, it's been a good quarter for digital assets – in terms of performance, anyway. Those who bought and held in January are richer. It will be interesting to see what this next quarter brings, and if the underperformance in perception takes a turn for the better.

From CoinDesk’s Nick Baker, here’s some recent news worth reading:

To hear more analysis, click here for CoinDesk’s “Markets Daily Crypto Roundup” podcast.