Bitcoin the best asset class in an ugly Q3

Which asset class performed best in the third quarter? Believe it or not, it was Bitcoin.

The world’s largest cryptocurrency topped the ranks with a noisy return of 3.1%. Hmmm.

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Yes – perhaps nothing sums up the hideous market more than the best performing asset class scraping in as barely positive. Precious metals returned 1.3%, while cash investors enjoyed a return of 0.2%. Any other asset class? Negative.

As inflation has rumbled, the Federal Reserve has raised interest rates, sending markets into a tailspin. Throw in a war in Europe, an energy crisis as winter approaches, and countless other bearish factors, and it starts to make sense why the market has plunged.

Bitcoin one of the worst assets to hold

Looking at annual returns, rather than just Q3, paints a different story. Bitcoin has been in freefall, shedding over half its value so far – well south of some other major asset classes, as shown in the chart below.

As the market has turned down risk, returns have generally been in line with what can be expected in bear markets. This means that the further out on the risk spectrum, the further assets have fallen.

For crypto, this is bad news and the reason why Bitcoin has been so rotten. It also explains how almost every other cryptocurrency has fallen further than Bitcoin.

Looking at the numbers above, the S&P has fallen 25%, roughly half of Bitcoin. I actually would have guessed it would be more if you had asked me at the beginning of the year where Bitcoin would be if the stock market hit 25%.

The Nasdaq is further out on the risk curve, and is more technology-focused, with a fall close to 30%. And gold does what gold does – hangs in there.

Dollar is the best performing asset

In times of crisis, investors flock to safe-haven assets – for proof of this, look no further than the fact that the US dollar has been incredibly strong so far this year, dominating almost every currency worldwide.

After all, there is nothing safer than the US dollar. Adding to this fact is that so many obligations worldwide are denominated in USD, which means debtors are scrambling to get dollars. In addition, the Federal Reserve has increased more aggressively than many other major currencies, such as Europe and Japan, attracting capital flows to take advantage of higher yields and thus strengthen the dollar further.

What does Q4 contain?

The fate of Bitcoin, stocks and other assets in Q4 will largely depend on inflation and interest rate hikes (what’s new?).

The next CPI reading is Thursday (October 13^th) and therefore we should see volatility to end the week and a sign of what things may hold for Q4. If inflation fails, expect a hawkish Fed and more selling across the market.

But if Q4 can deliver OK CPI readings, and avoid major negative macro implications, it could at least be in line to surpass what was a dreadful Q3. In other words, in the short term, no one knows. But the next part is to train all eyes on Jerome Powell this Thursday.