There is no data to support crypto assets as an inflation hedge: S&P Global | coindesk JAPAN | Coindesk Japan

Ratings agency S&P Global Ratings on May 9 focused on the attractiveness of crypto assets (virtual currencies) as assets that protect investors from the effects of inflation, but pointed out the lack of data to back it up. bottom.

“Crypto assets could theoretically be a hedge against inflation,” the New York-based institution said in a release to CoinDesk, citing adoption in several emerging markets battling high inflation. bottom.

“Some have argued that cryptoassets act as stores of value and therefore will be in demand in a high interest rate, high inflation environment. I think,” he said, calling attention to Bitcoin’s (BTC) low correlation with inflation in the United States.

Crypto advocates see bitcoin, the world’s largest cryptocurrency by market capitalization, as a store of value asset like gold, with a program code that halves the pace of bitcoin’s supply expansion every four years.

The so-called halving of mining rewards is at odds with the ever-increasing global supply of fiat money (advocates believe that large-scale printing of money by central banks will lead to inflation). A broader cryptocurrency market, including decentralized finance (DeFi), is seen as an alternative to the current centralized banking system.

But historical data suggests otherwise. S&P Global Ratings finds a historical correlation of just 0.10 between daily returns on the S&P BDMI (the institution’s cryptocurrency index) and US 2-year and 10-year breakeven inflation rates I understand. The correlation between the S&P BDMI’s rolling 3-month return and 10-year breakeven inflation rate does not show a definitive pattern, the agency said.

In other words, there is little connection between the cryptocurrency market and inflation. A strong correlation of at least 0.75 would be needed to test the inflation hedge scenario.

Breakeven inflation is a measure of investors’ inflation expectations over a period of time, calculated by subtracting inflation-protected bond yields from nominal bond yields.

Bitcoin’s market value plummeted by more than 70% last year, even as inflation in the US, as measured by the Consumer Price Index, averaged 8% last year, according to Statista.

Comparing the three-month returns of the two shows no decisive pattern. (S&P Global/Fred)

This chart shows some of the times when rising inflation expectations failed to lift cryptocurrency market valuations. There have been periods when both were positive or negative at the same time.

On the other hand, the agency notes that since 2013, gold’s daily returns have consistently tracked inflation expectations, stating that “the Granger causal gap between the 10-year breakeven inflation rate index and the S&P GSCI Gold index is at the 95% level.” We have sex test evidence,” he added.

Granger causality test is a statistical hypothesis test to determine whether the time series X is useful for predicting Y.

“The same test will not work for Bitcoin,” notes S&P Global Ratings.

At the same time, crypto assets appear to be sensitive to the economy’s borrowing costs, tending to move in the opposite direction of US 2-year yields, which are more sensitive to interest rate expectations than long-term bond yields.

This chart shows the inverse correlation between the two. (S&P Global/Fred)

“On a daily rolling 3-month basis, interest rates (two-year yields) and the crypto-asset index have been inversely correlated with a probability of 63% since May 2017. This is after the start of the COVID-19 pandemic in 2020. It will increase to 75% from May 2020,” said S&P Global Ratings.

｜Translation: coindesk JAPAN
｜Editing: Toshihiko Inoue
| Image: S&P Global/Fred
｜Original: Are Cryptocurrencies an Inflation Hedge? Theoretically Yes, Factually No Says S&P