The sudden plunge in the price of Bitcoin has demonstrated that while it lacks correlation with the broader financial market, it is not inversely correlated with the global market.
Bitcoin and major cryptocurrencies are considered as a robust store of value for investors to hedge against the broader financial market because of its lack of correlation with equities, stocks, currencies, and bonds.
Lack of Correlation is not Inverse Correlation
In an interview, Matt Hougan, the vice president of research and development at Bitwise Asset Management, stated that the fundamental drivers of crypto are different from that of the traditional finance market.
But, Matt emphasized that non-correlation is not equivalent to inverse correlation and as such, investors should not expect the price of Bitcoin to increase when the traditional finance market or the stock market declines in value.
“Non-correlation is not the same as inverse correlation so there’s no guarantee that when the market goes down crypto will go up. Over the long term, we think the fundamental drivers of crypto are different from the fundamental driver of equities and other assets, and we would expect the low correlation to persist,” Matt said.
On October 11, the US stock market saw a substantial decline in value, which saw Jeff Bezos, the CEO of Amazon, lose more than $9.1 billion in personal net worth within a 24-hour period.
Charlie Ripley, a senior investment strategist for Allianz Investment Management, said that higher interest rates have contributed to the drop in stocks.
“Higher interest rates typically bring on tighter financial conditions which could dampen growth going forward and equity markets are reacting to that,” said Charlie.
Medha Samant, investment director for Asian equities at Fidelity International, further emphasized that the global stock market sell-off spooked sentiment amidst fears that US markets would succumb to sell pressure after one of the longest bull rallies in the history of the country.
Alex Kruger, a cryptocurrency analyst and trader, said that a breakout of Bitcoin above a major resistance level in a period in which stocks are experiencing a large drop in value could allow the dominant cryptocurrency to see a massive increase in demand.
“A BTC breakout today, in a day when stocks and bonds are getting crushed, would be noticed by the whole world and would be very bullish. Waiting,” he said.
However, Kruger also noted that the correlation between stocks and traditional assets like gold and treasuries has also weakened in the past year. Thus, a struggling global market could also lead the crypto market to fall.
“Treasuries and Gold are two assets widely used as portfolio hedges. Correlations with stocks broke down in 2018. Hence, in the event of a market crash, portfolios may suffer losses both from the stocks side and the hedge side. Forcing PMs to sell assets, accelerating a crash.”
Bitcoin Wasn’t in an Ideal Position to Recover
After recording a yearly low daily trading volume, Bitcoin struggled to demonstrate a recovery in its momentum and price trend. Other major cryptocurrencies and tokens were affected by the lack of momentum in BTC, unable to initiate a promising price movement.