For those that do not know, Bitcoin is intuitively tied to the stock market’s performance. This article will attempt to explain how and why as well as what the relationship is between the stock market and Bitcoin’s price.
What is the Relationship Between the Two?
In order to decipher the relationship between the two, one thing must be made clear:
Bitcoin is bought and traded by institutional investors.
The reason for why this statement must be emphasized is because there are a slew of individuals in the crypto space that are under the impression that Bitcoin is not currently touched by institutional investors in any capacity.
This would be patently false.
Institutional Investors Have Been Invested in Bitcoin for Quite Some Time Now
The narrative that Bitcoin is still awaiting the advent of ‘new’ institutional investors has been perpetuated by publications and other influential crypto members that post ideas such as the one shown below:
Galaxy Digital’s Mike Novogratz made a comment earlier this year that the cryptocurrency industry will be seeing a “herd of institutional investors” entering soon. With that simple suggestion, many firms decided to start creating products and services that can accommodate these investors, especially at a high volume.
The concept that there is an aggregate of institutional investors that are waiting for the moment to buy into Bitcoin the second that Bakkt or another comparable exchange launches has no basis in reality.
This was confirmed by Morgan Stanley strategist, Mike Wilson, in an interview with ‘The Street’ earlier in the year.
In the midst of commenting about the general stock market, Mike Wilson explicitly stated in the interview that:
“‘We believe we are in a ‘rolling bear market,’ a market where risk assets across sectors and geographies reprice to account for the removal of central bank provided liquidity,” Morgan Stanley strategist Mike Wilson told TheStreet in September. “Less central bank liquidity support as we near the end of an economic cycle should bring higher volatility, as risk assets and markets lose some of their ability to absorb shocks. Our call is not for a simultaneous and large repricing across risk assets, but for a bear market that rolls through different assets and sectors at different times with the weakest links (Bitcoin, EM debt and equities, BTPs, funding spreads, base metals and early cycle industries like home builders and airlines) being hit first/hardest.’”
The most important comment to take note of here is the one where he states that the weakest links, like Bitcoin, will be hit ‘first/hardest’ during a ‘rolling bear market’. Specifically, when mentioning bear market, he was referring to the U.S. stock market.
U.S. Stock Market Performance Tied Into Bitcoin
The truth of the matter is that Bitcoin is seen as an asset by institutional investors. Therefore, when there is a sell-off of assets in the traditional stock market, the price of Bitcoin tends to follow suit.
There are several examples that can be pointed to in the last week (from the date of publication) alone.
On December 5th, the Dow Jones shed 800 points to finish the day, which is a substantive loss and ranks among the top 20 greatest single-day point losses in U.S. stock market history for the Dow Jones.
Similarly, the price of Bitcoin, from December 5th — 6th, fell by approximately 11%, which is substantial.
There are a slew of similar examples (today; December 14th 2018 included) in which negative performance for the stock market has resulted in similarly negative returns for the price of Bitcoin as well.
The Sell-Off Proves a Few Truths About Bitcoin
The sell-off proves that:
- Bitcoin is considered to be an asset by the general markets.
- #1 means that Bitcoin also is not considered a store of value at this time because a store of value is not an investment but rather a hedge against the depreciating price of other investments.
- There are already a number of institutional investors that are involved in Bitcoin.
- The volatility of Bitcoin, while being its most positive characteristic during a bull market, is also its kryptonite in a bear market. This may explain why there has been such dramatic dumping of Bitcoin on to the markets.
- There may be a lot of blood that is still yet to come. The U.S. stock market is nowhere near what could be qualified as a ‘bear market’ at this point in time (yet), and there are a number of regulatory actions that are still on the horizon for the crypto sphere in general.
Given all of the information above, it would be most prudent for crypto traders and investors to at least peripherally follow news regarding the stock market so that they may plot better trading strategies.