Crypto Prices Move in Tandem With Traditional Markets, Punishing Investors

Crypto prices are moving faster with stocks and bonds than ever before, punishing those who bought bitcoin and other digital assets in part to diversify their investments.

According to Dow Jones Market Data, the three-month correlation between cryptocurrencies bitcoin and ether and major U.S. stock indexes hit a record high last week. That level, between 0.67 and 0.78, is more than three times the average correlation between cryptocurrencies and the S&P 500 from 2019 to 2021. A correlation of 1 suggests the market is moving in the jump. , while 0 indicates they are not related. One- and two-month correlations are at record levels.

The day of that record correlation, bitcoin fell 10% and the Nasdaq Composite index dropped more than 4%, marking the steepest three-day point decline on record. Although bitcoin and other digital assets have long been considered one of the riskiest investments in the market, analysts and portfolio managers say the magnitude of the decline in cryptocurrencies This year’s death and a repeat trend in other risky assets like equities could limit adoption by mainstream investors.

Cryptocurrencies have “become part of the mainstream financial system and that doesn’t bode well for its viability as an alternative asset class,” said Richard Craib, who runs a quantum hedge fund in Singapore. San Francisco named Numerai, said. “It does not serve its original purpose as an unrelated property.”

Stocks, bonds and cryptocurrencies all fell in price as investors struggled to manage the highly volatile financial markets around the globe. WSJ’s Caitlin McCabe looks at some of the reasons behind the recent market frenzy. Photo: Spencer Platt / Getty Images

Last week, Mr. Craib sold $2.5 million in ether, all of his holdings, in part because ether is already heavily traded like stocks and bonds. He bought crypto for the first time in 2014.

For several years, proponents of bitcoin, ether, and other cryptocurrencies argued that they could serve as “alternative” investments that offset portfolio losses, or at least support any decline in stocks and bonds. Those arguments, among others, have helped convince many hedge funds and other professional investors to add bitcoin and ether to their portfolios.

Large funds, such as Cathie Wood’s ARK Investment Management and companies including Elon Musk’s Tesla Inc.

and Michael Saylor’s MicroStrategy Inc.

bought bitcoin, a move that has helped make financial markets more relevant to the crypto market.


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Meanwhile, crypto-related companies like Coinbase Global Inc.

went public over the past year or so, which has further connected the digital trading market to stocks and bonds.

But the market roadmap for 2022 – regardless of the items whose value has skyrocketed at times of high inflation – has topped that logic.

Traders and analysts say that one reason the markets move in tandem is that so many traditional investors have added digital currencies to their portfolios. Since they suffered from investments in stocks and bonds during the most recent market run, some investors raised cash by selling cryptocurrencies. At the same time, weakness in stocks and bonds has reduced many investors’ appetite for cryptocurrencies.

Last week, Alesia Haas, chief financial officer of crypto brokerage Coinbase, said: “Nasdaq is down, Bitcoin is down. And that has resulted in fewer and fewer dollars being put into crypto. ”

Jeff Dorman, chief investment officer at Arca, a digital asset investment firm that interacts with large institutions, said the 24-hour trading day of digital currencies helps hedge funds and investors alike. Other investors easily enter bearish trades when they are pessimistic about the outlook. for markets. He also said some funds have sold digital assets because they don’t want to have to explain to more conservative clients why they are holding these speculative investments.

“They are selling it for their fund,” he said.

Until recently, institutions and other new entrants were seen as beneficial to the cryptocurrency market. Now, as some of the same investors sell in a tumultuous market, some say the downside to that shift is becoming more apparent.

“Be careful what you want with respect to institutional adoption,” said Mr. Dorman.

Some say the recent downward move in a lot of markets is a positive sign. Investors are slowly embracing the new world of higher interest rates, a realization necessary for financial markets to find their footing, the analysts said.

“When assets are sold on a large scale, it is an indication that a large subset of the market understands that there is a major regime change,” said Michael O’Rourke, director of market strategy at JonesTrading. and a valuation adjustment is underway.”

“The market needs to get to a place where it is widely accepted that the ‘no alternative’ environment is over,” he said, referring to the popular claim during the stock bull run of the past few years. recently that low rates mean that there are no alternatives to investing in stocks, cryptocurrencies and other risky investments.

Until recently, many mainstream analysts ignored the ups and downs of bitcoin, ether, and other digital currencies, arguing that they were mostly side effects to the economy and financial markets. official. Now, some wonder if troubles in the crypto world could have an impact elsewhere, perhaps as the plunging price weighs on spending by big bets on money. digitally or incentivize some to trim their stockpiles to cover crypto losses.

Mr. O’Rourke argues that equities are driving crypto right now, with little evidence crypto is having a broader impact on the economy or other markets.

Cryptocurrency bears note that investments of all types typically exhibit stronger correlations during bear markets, and that these trends usually don’t last.

Over time, Mr. Dorman predicts cryptocurrencies will return to being more unrelated to stocks and other investments, as new entrants into the digital asset market, including the more comfortable more comfortable holding assets during volatile market times. He noted that in the past, the digital currency was sometimes closely correlated with gold, the Chinese yuan, and even avocado prices.

“I believe that we will eventually look back to the events of February and March 2022 as a turning point for digital asset adoption, and this short-term spike in correlation will also only point to a negative impact. is a footnote,” he said.

Write to Gregory Zuckerman at

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