Bitcoin claims to ‘safe-haven’ asset status will come under increasing pressure as liquidity drains from the system over the next few months, according to the latest State Street Digital Digest.
Following up on its launch edition last year, the State Street Digital publication flags shrinking liquidity as posing “an even bigger test for bitcoin, than the crises it has weathered in the past three years.
All assets, including cryptocurrencies, have benefited from the low interest rates and ample liquidity offered by central bank quantitative easing (QE) and the like over the last decade, an article authored by Michael Metcalfe, State Street Global Markets head of macro strategy, says.
But “how markets react to the reality of liquidity tightening is still highly uncertain”, Metcalfe says.
The US Federal Reserve is early in its rate hiking cycle while slating a start to ‘quantitative tightening’ – or winding down its QE-bloated balance sheet – in June.
“… in a world of excess savings, crypto can attract inflows without the need to sell traditional assets. This will not be the case once excess savings have been unwound,” he says.
To date, though, bitcoin has weathered the tougher conditions relatively well as measured by flows to crypto-funds, although Metcalfe admits it is early days.
“Whether this will still be true as US interest rates head towards 2% and beyond over the summer is a key uncertainty though and reason for continued caution,” he says.
Metcalfe says whether bitcoin or other crypto-assets achieve safe-haven credentials will depend on how they emerge from “the passing of each test”.
“Safe haven assets are not created overnight,” he says. “Even the most traditional assets that have built their reputations over centuries or decades can have bad crises.”
The State Street Digital Digest, second in a series intended to be released quarterly, also covers off the current low environmental, social and governance (ESG) quality of crypto-assets, regulation of the sector and the digital transformation of finance and money.
State Street launched its digital division last year, appointing Nadine Chakar to head the business. Along with other financial institutions, including BNY Mellon and Fidelity, State Street is vying to provide back-office services such as custody and fund administration to the fledgling crypto markets.