Woke up this morning to Bitcoin bleeding red again (shocker). Crypto has been following equities for the last 6-7 months. What was supposed to be an alternative to fiat has turned into fiat – but on speed.
The Correlation is Real
Market movements between digital assets and fiat (using Bitcoin and Nasdaq) in this example have shown similar trends since July 2021. You can see clearly the market rallies in August and October 2021 followed by dips in December ’21/January ’22. Both markets showed similar structures in April 2022 as well.
COVID Effect
March 2020 was bad for everyone – not just digital assets. But Bitcoin’s massive runup at the end of 2020 and Q1 2021 could be attributed to retail. My theory is that as stimulus checks poured in, retailers had extra cash to throw into crypto. Shops were largely closed down, so where else could people spend their money other than Amazon and a little Bitcoin (or AMC/GameStop for that matter). In that sense, crypto was the best alternative to fiat in a closed economy and the numbers are there to prove it.
When China announced it would ban Bitcoin Mining in May 2021, crypto naturally took a hit, but it also looks like retail ran away with it.
Correlations to equities didn’t really start until July 2021, where – in my opinion – institutional investors (banks, hedge funds, big name investment funds) took the reigns on Bitcoin and began trading it as they would a fiat asset after seeing it’s potential during COVID lockdowns. Although this is just a theory, it matches up quite well with the historical charts. That’s not to say that whales and other wealthy traders haven’t been influencing Bitcoin and crypto markets during this time – their buys and sells probably make up for the small or delayed deviations we see between the two correlated assets (crypto and equities).
Where’s it Going?
Of course, the $3 Trillion Dollar question is “Where is crypto headed?”
No one can answer that question – most Twitter TA’s are clueless – but we have signals to look out for given the historical data. It’s important to note that markets react – they don’t predict. So if the market is slumping, it’s reacting to bad sentiment.
If equities are steering crypto’s direction, and equities are impacted by political sentiment, cash flow, and regulation, it’s safe to say we’re all f*cked for a little while. Fed rate hikes, inflation, and a weak political administration are all contributing to a market slump. Although they’re meant to be deflationary, interest rate hikes issued by the Federal Reserve have always yielded dips in the market. I’m failing to see how rate hikes now are going to reverse 3 years of bad stupid monetary policy when the real problem is getting more money flowing to the hands of the average working class American.
It’s no surprise that the purchasing power of the dollar has been reduced to dogsh*t after the Federal Government literally handed out free money to people during COVID lockdowns. Inflation today (measured at roughly 9%) means people have less “spare cash” to throw into investments as it’s being spent on keeping up with the costs of goods and services instead. Inflation would be less worrying if wages kept up with the cost of living, but they’re not and, instead, we’re experiencing stagflation – essentially the poor are getting poorer. So retailers who were smart enough to cash out their Bitcoin after the 2021 run up are probably doing ok right now, but investors who bought in and dollar-cost-averaged September/October 2021 are hurting.
Lastly, there’s piss poor political will – the President can barely string a sentence together and both political parties in the U.S. are hell bent on destroying each other at the expense of the tax-paying public. So the real problems are being ignored and the working class suffers as a result.
Sentiment right now is terrible. And it’s going to get worse until wages are fixed and people see crypto as a solid, responsible alternative to fiat currency.