Why Did the iShares Bitcoin Trust Drop 17% in April?

The iShares Bitcoin Trust ETF (NASDAQ: IBIT) is down 17.1% in the past month, according to S&P Global Market Intelligence data. The exchange-traded fund was launched earlier this year and has become a popular vehicle for people looking to include Bitcoin in their investment portfolios. Macroeconomic conditions created a positive environment for cryptocurrency in the first quarter, but this reversed in April.

Bitcoin exhibits remarkable correlations

Bitcoin has become a more popular asset class with wider acceptance among investors. This reputation shift is often a force that stimulates demand and helps Bitcoin holders. However, this legitimacy comes with consequences such as exposure to dominant forces in global capital markets.

Image source: Getty Images.

In recent years, prices of Bitcoin and other high-profile crypto assets have been highly correlated with other speculative assets. The chart below shows the five-year performance of the ProShares Ultra QQQ ETF, a leveraged ETF intended to triple the daily performance of Bitcoin and the Nasdaq Composite. Bitcoin and tech stocks are subject to common market forces.

TQQQ Total Return Level Table

For most of the last five years, Bitcoin’s price has behaved like high-growth tech stocks, except with more volatility. It appears that growth investors are buying and selling this crypto asset as their overall risk tolerance waxes and wanes. It is no longer a viable community for supporters of the technology and does not behave like a precious metal.

This relationship was also valid in April

Bitcoin’s relationship with growth stocks continued in April, and the iShares Bitcoin ETF fell along with it.

Bitcoin Price Chart

Interest rates may be the most important macroeconomic factor for the stock market right now. The Federal Reserve raised interest rates in 2022 to combat price inflation. High rates discourage borrowing, which in turn discourages consumer spending, corporate growth investments, and hiring. Because these conditions create uncertainty, they tend to restrict investors’ risk tolerance. Businesses face a potential recession and weak growth prospects, making them less attractive to potential buyers. Interest rate increases also increase the ability to earn higher returns from lower-risk assets such as bonds. This deters investors from buying riskier assets, and Bitcoin is among this group of risky assets.

Investors have been waiting for the Fed’s tight policy to end for more than a year. When inflation approaches the target rate, the central bank is likely to gradually reduce interest rates. Last year’s economic data led investors to expect a rate cut in mid-2024.

The story continues

This optimism took a hit with the arrival of the latest economic indicators in April. Inflation was higher than expected and employment data was better than expected. The Fed is less likely to cut interest rates due to strong employment and high inflation, so investors have had to revise their expectations. Interest rates appear less likely to fall anytime soon. After a positive few months for growth stocks and cryptocurrencies, recent signs of trouble have caused investors to sell and hold on to some gains.

Bitcoin is exposed to the downside potential associated with other popular risk assets that have prevailed over the past month. This shouldn’t deter long-term investors, but they should anticipate more volatility going forward.

Should you invest $1,000 in iShares Bitcoin Trust right now?

Before buying shares in iShares Bitcoin Trust, consider:

The Motley Fool Stock Advisor analyst team identified what they believe are the 10 best stocks for investors to buy right now… and iShares Bitcoin Trust wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the coming years.

Consider that Nvidia made this list on April 15, 2005… if you had invested $1,000 on the date we recommended, you would have had $554,830!*

Stock Advisor provides investors with an easy-to-follow success plan, including guidance on portfolio construction, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of the S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 6, 2024

Ryan Downie has no position in any stocks mentioned. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool has a disclosure policy.

Why Did iShares Bitcoin Trust Drop 17% in April? originally published by The Motley Fool