Bitcoin is expected to recover to $28,000 by the end of the year, given its strong correlation with the US stock market, according to an analysis by Deutsche Bank.
Bitcoin plunged in 2022 as rising interest rates and inflation fears sparked risk aversion. An analysis by Deutsche Bank analysts Marion Laboure and Galina Pozdnyakova shows bitcoin will be up more than 30 per cent by year-end from Wednesday's trading level of about $20,000, but even that would still be less than half its November peak.
Laboure and Pozdnyakova say that since November cryptocurrencies have become increasingly correlated with benchmarks such as the NASDAQ (10941.2301, -236.66, -2.12%) 100 and the S&P 500. They expect the S&P 500 to recover to January levels by the end of the year, and bitcoin could follow suit.
The digital currency is more like a highly marketed asset, diamonds, than a stable safe-haven commodity, gold, the pair wrote.
Bitcoin has failed to live up to the predictions of some experts and market watchers that it would prove to be a haven for investors, falling more than 50% this year. Digital currencies have underperformed equities, bonds and commodities throughout the market rout, with downward pressure on their prices as major central banks mop up excess liquidity. Gold, on the other hand, has done much better.
Laboure and Pozdnyakova tell the story of diamond giant De Beers, which changed consumers' perception of diamonds through advertising campaigns, creating the myth that a diamond is forever.
"By marketing an idea rather than a product, they built a solid foundation for the $72 billion-a-year diamond industry that they have dominated for the past 80 years," the analysts wrote. This is true for diamonds, as it is for many goods and services, including Bitcoin."
Deutsche analysts also pointed to problems in the crypto space in recent weeks, including turmoil among certain digital asset hedge funds and lenders.
"Stabilising token prices is difficult because there are no common valuation models such as those found in public equity systems," they write. In addition, the cryptocurrency market is highly fragmented. The free fall of cryptocurrencies is likely to continue due to the complexity of the system."