The growing relationship between stocks and cryptocurrencies could destabilize financial markets. Stocks are traded intraday, cryptocurrencies are traded on a spot basis, and in this respect there are similarities between the two. So what correlation is there between the cryptocurrency market and the stock market?
Tech stocks and cryptos, what’s the link?
Indeed, Bloomberg News revealed that the price of cryptocurrencies namely, Bitcoin and Ethereum (BTC and ETH) is similar to that of technology stocks , and this, particularly in this period of end of this pandemic of COVID-19.
Thus, the report showed a 40-day correlation between Bitcoin and Nasdaq which is 0.6945! This is a real record level compared to past years.
In this regard, several analysts believe that BTC would not be the diversification tool as many think…
Correlation can lead to lower prices
One of the proponents of this theory is Arthur Hayes. He is the co-founder of the BitMEX exchange. Hayes had recently made a prediction on the price of Bitcoin. According to him, the price of BTC could go up to $1 million.
However, in an article recently published on the Medium site, he discussed the arguments put forward to induce “buy or sell”. He also discussed the current relationship between cryptocurrencies and financial markets.
According to Hayes, this hurts cryptocurrencies, which are designed to hedge risk. He adds that it makes no sense to recommend buying cryptocurrencies while waiting for NASDAQ to go down. However, the relationship between these two currencies is real.
Nonetheless, Mr. Hayes believes that the value of tech stocks will decline regardless of what happens to cryptocurrencies. He believes that rising interest rates, slowing economic growth and current global liquidity will make this development inevitable.
Tech stocks dominated by a variety of companies
Hayes also argues that the reason Nasdaq has kept its current price level is because a handful of profitable companies currently dominate the market.
Shares of Google, Microsoft, Tesla, and Apple account for +40% of the index. And they performed relatively well, even if they fell lower than their previous peaks.
Basing his analysis on this basis, Mr. Hayes foreshadows a more serious situation that could arise in the virtual currency markets. Because, when the NASDAQ stock market falls, the value of cryptos will also fall. According to him, the value of bitcoin could reach $30,000 by the end of the first half of this year. However, this may not happen if the ratio between Bitcoin and Nasdaq drops before the NDX collapse.
Unlike stock and currency trading, cryptocurrencies are not regulated by any government. The price of cryptocurrency is mainly determined by demand and supply. It will therefore be wise to inform yourself before any decision to invest in cryptocurrencies and stocks. One significantly influences the other.