Stocks tumbled earlier this week as the US-China trade war escalated again. Meanwhile, Bitcoin continued the climb that started earlier this spring. CNBC initially made the connection and suggested causality.
According to the CNBC report, Bitcoin went up 15% while the Dow Jones Industrial Average fell nearly 700 points. The stock price fall was largely due to earlier White House announcements that the US would increase tariffs on Chinese goods. This took many by surprise as negotiations between the two countries had seemed to have been going well.
Similarly, the report said that the trade dispute, which impacts many conventional markets, made decentralised currencies more appealing. That is despite the volatility, often associated with decentralised currencies, that has prevented large-scale adoption by users and investors.
How Stocks Affect Other Holdings
Individual stock values can be less predictable than any cryptocurrency – large events, like trade disputes, can drive down entire markets. Historically, when this occurs, investors are more likely to sell off the affected stocks. However, they buy other stocks or commodities rather than just counting their losses. The best known and most telling of these “safe-haven assets” is gold.
There is a well-known and well studied correlation between the health of the stock market and the value of gold. When stocks are going down, gold is going up. As the CNBC article pointed out, cryptocurrencies have not shared this correlation.
It could be that crypto is rising on its own merit as stocks tumble in a series of events related only by time. However, it could be that the nature of how people interact with cryptocurrencies is changing.
Bitcoin and Stocks
As mentioned above, crypto value and stock values haven’t always mirrored each other over time. The Dow Jones has had its ups and downs but has been on a general up-trend (with the exception of this past week) since around Christmas 2018. During this time, Bitcoin was falling after modest gains that it had made earlier in the month. However, Bitcoin has been on a general up trend since at least early February. Bitcoin also had a fantastic rise in the first week of April, during which time the Dow Jones was also rising. Its most recent increase has put it past the US$8000 mark for the first time since July of 2018.
Before a possibly condensing correlation between cryptocurrency value and stock value, crypto analysts were reporting that the rising value of crypto was due to a recovery from the “crypto winter”. The term refers to massive sell-offs from crypto’s record-high values in December 2017 to lows in December 2018.
During this low, however, reports began to emerge of institutional investors entering the crypto market. Early reports suggested that this would be very good for crypto. It is yet unclear whether this would be enough to tie Bitcoin value to stock value as tightly as CNBC has suggested could be the case.
Further, early reports say that the stock market is already recovering from earlier losses. However, as of this writing, the value of Bitcoin and other cryptocurrencies continues to rise. At the very least, this suggests that crypto and stock markets are still not one-to-one.
It could well be that changing sentiment in the crypto community has lead to the Bitcoin rise that has recently mirrored the stock exchange fall. However, it could also be that the entrance of institutional investors into crypto markets could have lead to increased correlation.
It will be interesting to watch both markets going forward. However, it may not yet be wise to buy and sell Bitcoin based on the value of stocks.