Bitcoin’s risky correlation with big tech, risky assets and the stock market


Bitcoin has been booming for some time with traditional markets, removing any doubt that the # 1 digital currency and the overall crypto market have some correlation with the stock market.

In March 2020, when the Nasdaq, Dow Jones, and S&P 500 fell to their lowest in a year, bitcoin slumped to $ 3,800 – its lowest in a year.

When the Federal Reserve announced unlimited printing of money to support the market, the new money supply and its expectations became the most important factor for stock and crypto markets which tend to rise when liquidity is made available for free. , Blockchain News reported.

Since then, the stock and crypto markets have started a bull run. The Nasdaq, Dow Jones and S&P 500 hit record highs, as did ethereum and bitcoin, which hit $ 19,920.53 according to data provider Coindesk. As of this writing, bitcoin is trading at $ 19,374.

Here are five things to know about bitcoin’s risky correlation with big tech, risky assets, and the stock market.

Bitcoin as an asset

Being the de facto global currency, the US dollar is the benchmark for everything else, including assets and other fiat currencies, a.k.a. the colonization of the US dollar. Although bitcoin and other cryptos can function as currencies such as payments and store of value, the market capitalization of cryptocurrencies is small compared to traditional finance, and most financial activity is based on the fiat currency, Blockchain News reported.

In other words, the financial inclusion of cryptocurrencies is not enough. If bitcoin and other cryptos replace more traditional financial functions, it may reduce the role of the U.S. dollar and other fiat currencies, and the relationship between bitcoin and other fiat currencies will change.

Growing correlation with stocks demystifies bitcoin’s safe-haven narrative

If bitcoin is a safe haven, why is it crashing when the going gets tough?

The positive correlation between bitcoin and the benchmark S&P 500 stock index means that bitcoin’s price movements are consistent with those of the stock markets, Bloomberg reported. When President Donald Trump tested positive for the coronavirus in early October, the stock market fell, but bitcoin fell again. Gold attended a small rally.

The S&P 500 was down 6 percent from its September high, while bitcoin was down about 15 percent from its mid-August high. The move went against the oft-touted narrative that bitcoin is heaven.

Usually, a safe haven is something of value – most famously, gold – that thrives during tough times such as recessions. Since its launch, bitcoin has been defined as a safe haven.

This is not necessarily true. “Bitcoin is not exactly a safe haven asset yet, but its monetary policy and long-term trajectory shows that it is gaining ground,” according to one post by the Norwegian block exchange (NBE), a cryptocurrency exchange.

Digital gold

Crypto investors say bitcoin is digital gold and should occupy a similar place to gold as a reliable fallback in times of crisis. So why did bitcoin fall when times were tough?

Some analysts argue that while bitcoin is highly correlated with traditional stocks, it won’t be forever.

Institutional investors on Wall Street are increasingly turning to crypto. Bitcoin’s reputation as digital gold grew earlier this year when investor Paul Tudor Jones said he was buying it as an inflation hedge that he sees coming due to the print. monetary policy from the Federal Reserve and the central bank, Forbes reported.

PayPal and Square payment companies both bet on bitcoin.

It is short-sighted to think that bitcoin cannot be a safe haven because it fell when the U.S. stock market fell in March 2020, NBE reported. This is because the digital coin has only been around since 2009. Covid-19 is “the first major test of the theory that it is digital gold and, therefore, a better haven.” Until the covid is over and global markets have “really rebounded”, it won’t be reasonable to conclude what served as a safe haven during those times.

Behave like a technological stock

Tech stocks including Apple, Google, Amazon and Facebook surged during the coronavirus pandemic. Bitcoin has outperformed them all, including the massive rally in Amazon stock prices in 2020 and the surge in the Nasdaq.

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London-based digital asset management firm CoinShares has recommended investors allocate 4% of their portfolios to bitcoin, arguing that in its growth phase, it “behaves like a tech stock.” Forbes reported in August.

“As a disruptive technology, bitcoin’s risk profile is quite similar to that of a tech security: if it reaches its potential, the value could be immense, but at the same time, there is a chance that it fails completely, leaving the value of bitcoins close to zero, ”wrote James Butterfill, CoinShares research strategist.

Bitcoin as a risky asset

Gold is still the main safe haven asset for a mile with the best cryptocurrency acting as a risk asset, Cryptobriefing reported. The value proposition of bitcoin is that it is a higher, digital gold version. “This thesis has merit, but the behavior of market players does not add up.” Bitcoin’s place as a safe haven asset has been interrogates again and again. Each time, the evidence indicates that the primary digital asset is a risky asset.

Investors don’t buy BTC en masse during uncertain economic times, wrote Ashwath Balakrishnan for Cryptobriefing. Since the March 2020 global crash, bitcoin has been following stocks closely and solidifying its position as the best risk-adjusted game on a post-covid recovery. It has blanket properties, but not yet those that make it an economical blanket.

“Today’s environment is rife with economic uncertainty, and investors seem to believe that this is not an ideal situation for bitcoin,” Balakrishnan wrote. “There is no doubt that the Genesis cryptocurrency has a strong thesis rooted in an evolving economic system, but the market at large has yet to realize this. Gold remains without a shadow of a doubt the main safe haven asset and BTC is a risky asset. “

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