Investors should be skeptical of the narrative that rising adoption of cryptocurrencies must translate into higher prices, according to Goldman Sachs Group Inc.  

As tokens like Bitcoin gained wider mainstream appeal in the past couple of years, their correlation with other macro assets has increased to where crypto is now at the center of recent rotations across asset classes, Goldman strategists Zach Pandl and Isabella Rosenberg wrote in a note published Thursday. That flies in the face of cryptocurrencies as an ideal tool for diversification. 

The price of Bitcoin appears positively correlated with proxies for consumer-price risk like breakeven inflation and crude oil prices as well as “frontier” technology stocks, and negatively correlated with real interest rates and the U.S. dollar, they said.

Crypto’s recent selloff underscores that “mainstream adoption can be a double-edged sword,” the strategists wrote. “While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

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As the U.S. Federal Reserve and other central banks moved to tighten monetary policy in the past few months, real rates have risen and the greenback has largely appreciated. That’s hurt digital tokens and high-priced technology stocks alike, with the overall crypto market capitalization shrinking to about US$1.76 trillion, from more than US$3 trillion at the peak in November.  

“Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets,” the strategists said. “But these assets will not be immune to macroeconomic forces, including central bank monetary tightening.”