This does not matter for Bitcoin, because its use case as a transaction currency unraveled long ago. Radical improvements in traditional finance were a factor as were attacks by governments on crypto use for crimes they usually ignored. But the biggest reason was crypto innovations such as Ripple or Nano, which were far better transaction currencies.
By around 2015, the value case shifted to the “digital gold” argument. Bitcoin would be a value anchor to crypto and used for transferring traditional currencies in and out of crypto, the way gold was a value anchor to paper currencies for centuries, used for settling accounts among central banks.
From this view the value of Bitcoin depends on three things: the ultimate value of crypto projects, the amount of traditional currency moving in and out of crypto, and whether alternative means of providing a banking system for the crypto economy prove superior.
The first, the value of crypto projects, is basically a technology venture investment—lots of exciting ideas that might change the world and be worth trillions; little actual revenue or profit in traditional currency terms.
Traditional currency moving in and out of crypto has been subject to boom and bust, or in crypto-speak, summer and winter. In crypto summer, lots of money flows in, but also lots of crypto people cash out at least some gains. Moreover, people use Bitcoin to move from one crypto project to another. In crypto winter, there is little flow in either direction, thus little demand for Bitcoin financial services.
The least volatile element has been in financial services competition. Bitcoin has rapidly improved its connections with traded public futures and options, efficient borrowing and lending, secure custody and other aspects of a sophisticated modern financial system. If a spot Bitcoin exchange-traded fund is approved by the Securities and Exchange Commission in January, as expected, this will improve matters. Everything people do with stocks and bonds—invest, raise capital, hedge, speculate, exchange, hold—they can do at least as efficiently with Bitcoin, which also offers immediate access to the full crypto economy.
Stablecoins have achieved niche success in comparison. Only Ethereum among other cryptocurrencies has developed any sort of native financial system, and it lags far behind Bitcoin. Attempts by traditional financial institutions to harness blockchain and other crypto technologies also have niche successes, but they do not threaten Bitcoin’s hegemony. Some major attempts to build financial services directly into crypto, like FTX and Celsius Network, collapsed in 2022, and all were tainted by the fallout.
This three-step value proposition explains the unstable correlations.
The market value of crypto projects depends on investor enthusiasm for technology ventures, which has a high correlation to technology stocks. But the enthusiasm for putting money into crypto often has the reverse correlation, with disappointing tech returns sending optimists and risk-lovers to crypto.
The latest doubling of Bitcoin prices seems mostly related to increasing regulatory clarity and tolerance, which does not seem to extend to stablecoins or other crypto. This enhances both the efficiency of the Bitcoin financial and banking system, and insulates it from competitors. Regulatory attitudes are mostly uncorrelated with asset prices.