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Bitcoin
BTC
and many other cryptocurrencies keep chugging downhill.
This week the bitcoin price plunged to a little over $38,000 before rebounding this morning. The price of ethereum and solana dipped a few basis points, XRP 15%, cardano 5%. Dogecoin and BNB are slightly up.
Meanwhile, renowned trader Peter Brandt—who earned his name in the crypto space by calling some of bitcoin’s biggest moves, including its 80% decline in 2018—warns crypto investors of a looming dot-com-like crash.
In a recent tweet, one of the world’s most respected “chartists” highlighted “structural similarities” in the Nasdaq between today and the eve of the dot-com crash and called it “deja vu all over again”.
Brandt believes, therefore, that bitcoin may be in for a major correction and its price could plunge to $27,000 in the short term.
[Ed note: Investing in crypto is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Bitcoin
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Zooming out
What do stocks have to do with bitcoin and crypto as a whole?
For starters, major cryptos are highly correlated to the stock market. They also have a high beta to stocks. That means crypto, in effect, amplifies moves in stocks. If stocks soar, cryptos soar higher. And vice versa. If stocks tumble, crypto goes into free fall.
Not only that, both the correlation and beta have significantly increased since the beginning of the pandemic. In a January report, the IMF wrote:
“Amid greater adoption, the correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets.”
Meanwhile, Alvin Tan of DataDrivenInvestor, points out that bitcoin’s “reactivity” to the stocks market today is “unprecedented” compared to its pre-pandemic price action.
“It is immediately obvious that Bitcoin’s stock market beta has turned persistently higher since the onset of the pandemic, implying that it has become more influenced by stock market fluctuations and in the same direction. The beta has remained near +1 or more pretty much since early 2021, and the persistence of this positive relationship is unprecedented in the pre-pandemic period,” he wrote in a Medium post.
That’s the S&P 500. The tech-heavy Nasdaq index is even more correlated to crypto. In fact, as Coindesk recently reported, bitcoin’s correlation to the Nasdaq today is the highest on record.
Looking ahead—will we see “decorrelation”?
If this relationship persists and central banks make good on their pledges to raise rates to rein in inflation, the Nasdaq and, by extension, major cryptos might face strong headwinds this year.
However, William Clemente, lead analyst at mining firm Blockware, thinks this correlation is temporary. And as bitcoin matures, its price action will diverge from riskier tech stocks. In fact, he thinks stocks and bitcoin will “break up” within a year.
“[I’m] going to go on record and say that I think we see a decorrelation between bitcoin and stocks in the next 12 months…”
If that happened, he added, it would be “quite powerful.”
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