Bitcoin: Born to be different, but turning into just another asset?

It seems that what started in 2009 as an innovative FX solution has simply become a hot asset class attracting capital every day. When digital assets first emerged, they were disconnected from traditional assets, but as they mature with the growing adoption of crypto, they are beginning to sync with traditional markets.

With the total market capitalization of crypto assets having exploded from just over $20 billion in January 2017 to nearly $2 trillion currently, investors and regulators are scratching their heads trying to figure out how they fit into the established market models.

There has been a lot of money flowing into crypto from traditional markets over the past couple of years. During this time, traditional markets and cryptocurrency markets have converged. As a risky asset, crypto was logically ranked alongside stocks. Various indicators show that tech stocks and Bitcoin are highly correlated at this point.

Therefore, factors affecting equities, such as Fed policy tightening, soaring inflation, and high unemployment, are also weighing on the crypto. It’s a risky sentiment in all areas right now, so we’re seeing it in crypto as well.

According to report by the International Monetary Fund, crypto and stock markets have become increasingly intertwined. Compared to pre-pandemic years, the correlation between Bitcoin (CRYPTO: BTC) price volatility and S&P 500 index volatility more than quadrupled, while bitcoin’s contribution to the change in S&P 500 index volatility increased by around 16 percentage points over the period post-pandemic. There is a similar trend for returns, with a significant increase in the correlation between Bitcoin and S&P 500 returns, as well as spillover from BTC returns to S&P 500 returns.

In light of this, the IMF says that crypto-assets can no longer be considered marginal assets and their extreme volatility could threaten financial stability. Finally, according to the report, regulators need to closely monitor crypto market activity and how financial institutions are exposed to these assets, and come up with policies that can mitigate the risks posed by the fallout from crypto prices. cryptography.

Source: IMF Global Financial Stability Notes. Crypto Connections: Spillover Between Crypto and Stock Markets

At its March meeting, the Federal Reserve is expected to raise interest rates to as much as 0.5%. Crypto and traditional market watchers agree that rising interest rates will significantly affect both markets.

In my previous articles, however, I noted that this negative effect may be delayed and is unlikely to occur before the end of 2022. We will have to wait and see how bitcoin and other cryptocurrencies react as this is not something we have seen before.

Traditional investors are tearing their hair out over crypto withdrawals

The phenomenal growth of cryptocurrencies has attracted both retail and institutional investors. However, they tend to approach it with a more traditional investment perspective as opposed to long-term holders of this nascent asset class.

The iconic Hide The Pain Harold meme best describes how painful it is to hold on during steep market declines. It’s a whole new experience for traditional investors.

It was for this reason that there was so much fear in the market and various analysts were writing that we were in the bear market when the price of Bitcoin fell nearly half from its peak in just two months.

Crypto veterans must have been amused by all the fuss, as they understand that this is a normal correction for the crypto market. Crypto-savvy investors seemed unfazed and continued to hold on.

The current correction can be compared to the consolidation phase we saw from May to July 2021. Based on the technical analysis, the weakness is expected to last until the end of February, after which we could see a new BTC rally which will take it to new heights, with ripple effects on other major cryptocurrencies. However, there are always unforeseen factors to consider.

Final Thoughts

Cryptocurrency has recently attracted many newbies who are getting used to it. What they need to know is that fluctuations in crypto markets are just as normal as in traditional markets, except they are much more volatile. With the gradual transition from crypto to traditional assets, volatility may become less extreme in the future. For now, that’s what it is.

When cryptocurrency prices fall, it’s a good time to buy. Buying at the top will not help your earnings increase. Obviously, this is not the case for new, too risky coins that have not yet been proven. If they are based on a technological breakthrough, rather than mere hype, they have a good chance of succeeding. Moreover, it is essential to follow the DYOR rule here as well and not to invest more than you can afford to lose, just like in traditional markets.

This article is for educational purposes only. Investing in cryptocurrencies is very risky, so those who are able to sustain a loss of their entire investment should only enter it.

Michael J. Birnbaum