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By Omkar Godbole

Legacy risk assets saw yet another sell-off early Monday as surging crude prices threatened to push the global economy into stagflation.

Gold responded by rallying above $2,000 per ounce for the first time since August 2020. However, bitcoin, often touted as digital gold, fell under $38,000 early Monday.

While the cryptocurrency has since bounced back to $38,700 alongside a recovery in the S&P 500 futures, prices remain well below last week's highs above $45,000.

"The pullback [from past week's high] is being driven by macroeconomic issues," Quinn Thompson, head of growth at blockchain-powered institutional capital marketplace Maple Finance, told CoinDesk in a Twitter chat. "Global commodity prices are going to all-time highs (part supply chain issues, part fiat debasement) and are weighing heavily on consumers."

"With previous economic slowdowns occurring in a low inflation environment, central banks are facing a new problem this go around and may not be able to add additional monetary stimulus as support," he added.

While money markets have scaled back expectations for rate hikes by the Federal Reserve in the wake of the Russia-Ukraine war, the central bank is still seen raising rates at least five times this year. The first 25 basis point rate hike is likely to happen next week.

In other words, the Fed put – a notion that the central bank will come to the rescue if assets tumble – appears to have expired. That said, emerging economies and European countries, which are likely to take a bigger hit from the Russia-Ukraine war, may keep their policy accommodative, lending support to bitcoin and asset prices, in general.

"I suspect growth projections for 2022 around the world will need to be sharply revised lower, and it will be interesting to see what the central banks of the world will do. I believe Europe and Asia will halt thoughts of monetary policy normalization, and with Europe on the front lines, I can't blame them," Jeffrey Halley, senior market analyst, Asia Pacific, Oanda, said in an email.

Bitcoin rose more than 14% to nearly $45,000 on Feb. 28, decoupling from the lingering weakness in stock markets to register its biggest single-day percentage gain in over a year. The rally was supposedly driven by expectations that Russians and Ukrainians would pour money into crypto to hedge against the heightened volatility in their fiat currencies.

"Last week's relief rally stemmed from the idea that Russia (and others) could potentially be large buyers of BTC as an alternative reserve asset after the world was able to unanimously disconnect a country from the global monetary system almost overnight," Maple Finance's Thompson said.

While the cryptocurrency has reversed the past week's spike, it has been relatively more resilient than traditional markets since Russia invaded Ukraine on Feb. 25, according to Coinbase. "Bitcoin's $34,400 support level was tested twice on February 25 and rallied both times, indicating strong buy interest around that price," Coinbase's February review published last week said.

Several reasons, including expectations of fewer Fed rate hikes, appear to have cushioned bitcoin from continued sell-off in stocks, the exchange noted.

According to technical charts, the cryptocurrency may be close to turning the corner.

On the weekly price chart, bitcoin formed an inverted hammer candle at the Ichimoku cloud support last week.

The candlestick pattern is identified by a long upper wick and a small body. The appearance of the candle after a prolonged bear run or at major lows often portends a bullish reversal.

By Omkar Godbole

While bitcoin's 60-day correlation with gold has stayed mostly negative to flat for the most part, things may change in the future.

Hedge fund Nickel Digital Asset Management's latest survey of institutional investors and wealth managers, who collectively manage around $110 billion in assets, shows that most heavyweight market participants see the leading cryptocurrency as a store of value asset.

"Three in four professional investors (73%) believe that because there are a finite number of bitcoins, the cryptocurrency is a viable asset to hedge against rising inflation," the survey's press release shared with CoinDesk said.

Further, 78% of the respondents said bitcoin's unique supply-side dynamics would bring more institutional allocation to bitcoin.

Bitcoin's supply has a hard limit of 21 million coins, and the pace of supply expansion is cut by 50% every four years via a programmed code called mining reward halving. That puts the cryptocurrency's monetary policy in stark contrast to traditional central banks, which have been expanding the fiat money supply for decades.

The institutionalization of bitcoin seen since the March 2020 crash has proved to be a double-edged sword. While on the one hand, it has legitimized crypto as an asset class, on the other, it has led to a stronger correlation with riskier assets.

The digital asset tends to move in tandem with high beta stocks, as Piper Sandler's Michael Kantrowitz tweeted.

According to Nickel Digital Asset Management, bitcoin's correlation to risky investments will eventually weaken and the cryptocurrency's inflation hedging narrative will become dominant.

"Investors should not view bitcoin as a safe haven asset at the current early stage of its adoption curve. Bitcoin clearly behaves as a risk-on asset and will remain such until wider institutional adoption takes place," Anatoly Crachilov, CEO and founding partner of Nickel Digital, said. "However, this does not undermine bitcoin's ability to provide a long-term hedge against inflation term thanks to its immutable, finite supply and credible neutrality, i.e., independence from any single country's monetary policy."

Investors could continue to look at alternative assets like bitcoin for inflation-beating returns in the long run. The real or inflation-adjusted returns on traditional fixed-income investments are likely to remain negative despite rate hikes, as elevated inflation is expected to rise further in the coming months. Together, Russia and Ukraine reportedly account for about a quarter of the global trade of staple goods.

The U.S. 10-year real yield has declined to -0.93% – a 50 basis point collapse in two weeks, according to data provided by Reuters. That's perhaps powering gold higher at the moment.

Some observers are hopeful that a continued move higher in the yellow metal would eventually put a bid under bitcoin. Note that gold led the cryptocurrency higher in 2020. The yellow metal rose to fresh record highs in August 2020, and four months later, bitcoin followed suit.

"The higher gold goes, the more likely BTC starts getting that correlation going again," Split Capital's Zaheer Ebtikar tweeted. "But buying gold is actually the worst."