While market purists have traditionally drawn a strong line between the young cryptocurrency market and the traditional stock market, analysts are now having a harder time denying the correlation between the two.
Who’s Hurting Who?
Some analysts have essentially been pointing their fingers at Bitcoin’s recent decline in price and gloating in what amounts to little more than “I told you so.” However, crypto non-believers have had to take a step back and reevaluate, following The Dow Jones industrial average’s record-setting plunge earlier this week.
DOW dropped 1,175 points by the end of the day on Monday, and it’s no coincidence that Bitcoin also fell to one of its lowest points in two months at the same time, temporarily trading below $6,000.
Though Bitcoin and other cryptocurrencies had already been experiencing a fairly steep correction, both the DOW and Bitcoin’s drop suggests a stronger correlation than was once believed.
According to Christopher Harvey, head of equity strategy at Wells Fargo, a hit to the stock market can cause weak-handed investors to sell their Bitcoin – mostly due to an unloading of risk. Harvey noted:
On Monday what we saw is all risk products sell off. As risk gets sold, it sometimes adds fuel to the fire.
He also described last year’s bull run as “money chasing,” which increased both volatility and the demand for liquidity.
Harvey also claims that, as the stock market charged ahead early this year, the level of risk continued to rise—encouraging those investors eager for big gains to take a look at the cryptocurrency market. Those same investors likely bailed on Bitcoin when the DOW dropped.
What Harvey doesn’t suggest, however, is that it also works the other way around—where Bitcoin and other cryptocurrencies could affect the traditional stock market.
After all, it’s not unreasonable to take the strategist’s own risk-centered argument and say that Bitcoin’s sharp decline from its all-time high in December had a direct impact on the stock market—especially once the dominant cryptocurrency found a home underneath the $10,000 mark. With Bitcoin representing a “high-risk investment,” watching it fall could’ve easily caused a sell-off of riskier investments in the traditional stock market.
Both the cryptocurrency and stock markets also shared a similar run-up to all-time highs during the euphoric bull run at the end 2017, perhaps helping carry each other.
Regardless of which market hurt which this week, one thing is certain: the correlation between cryptocurrency and traditional stocks is becoming more apparent by the week.
Do you think the Dow Jones’ sudden drop caused Bitcoin to reach an even lower-than-expected low? Or do you think Bitcoin’s correction caused a sell-off in the stock market? Let us know in the comments below!
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