One of the oldest questions in cryptocurrency is whether Bitcoin is tethered to the performance of the overall stock market. The current crypto market rally could indicate that Bitcoin and other altcoins are independent from dips in U.S. stocks.
The U.S. Stock Market Plunges
Up until the Q3 of this year, the stock market has performed exceptionally well compared to the cryptocurrency markets. As the crypto markets slogged through a year of losses, the U.S. stock market was experiencing another strong year of performance coming out of 2017.
However, beginning early October, the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite Index wiped out most of 2018’s gains.
The Dow Jones Industrial Average experienced some of its largest losses since 1931—the time of the Great Depression—losing 16.3 percent since October. The Nasdaq Composite Index (COMP) is even set to close in a bear market (usually defined as a drop of at least 20 percent from a recent peak).
The fall in stock prices is attributed to a chorus of investor concerns, including the pace of the Federal Reserve’s interest rate increases, the looming U.S. government shut down, concerns over the U.S. China trade war, and signs that the international economy is stalling.
Cryptocurrency Market’s Santa Rally
As of this week, the cryptocurrency markets have experienced a strong Christmas rally. Bitcoin is up 22.6 percent, going from $3,270 back to $4,000. And, for the first time in nearly a year, the overall crypto-markets have outperformed Bitcoin, gaining 28.7 percent and adding an additional $30 billion in market capitalization. For reference, the S&P 500 is down 6.7 percent since Monday.
That said, both the S&P and the cryptocurrency markets have experienced large losses since October. The S&P 500 is down 17 percent from October highs, while the crypto-markets were still in the midst of a bear trend, dropping 40 percent and shedding $90 billion in market capitalization.
Nonetheless, the crypto market’s Christmas break out could have other implications. A long-standing question among crypto traders has been whether the U.S. stock markets and cryptocurrency markets are correlated. Some have even speculated that Bitcoin could act as a safe haven during stock market downturns, although most major news outlets including Forbes and CNBC have dismissed the claim.
Ryan Rabaglia, head of trading with a cryptocurrency dealing firm OSL in Hong Kong, told Bloomberg that:
“The days of crypto being the safe-haven play and having a high degree of detachment from the rest of the world are seemingly diminishing.”
Yet, the most recent crypto-market rally could refute Rabaglia’s statement. As the stock market tumbles, the recent crypto rally could reaffirm that the stock markets and cryptocurrency market are untethered.
Travis Kling, a crypto portfolio manager, reaffirms that idea:
Crypto has never existed during a bear market in traditional assets.
BTC was birthed at the very beginning of the largest monetary experiment ever- globally coordinated QE. Ending QE is causing pain
There is a significant chance Crypto is the best performing asset class in 2019 pic.twitter.com/vIdKTrm5sV
— Travis Kling (@Travis_Kling) December 23, 2018
CryptoSlate will release another report in the coming week with an analysis of the beta (correlation) between the stock market and the price of Bitcoin.
Even if Bitcoin is not deemed a conventional safe haven asset, independence from the U.S. stock market could make crypto useful for a host of different trading strategies. Fund managers may want to include Bitcoin in diversified portfolios, retirees may include crypto in their 401Ks, and speculators can rest at ease knowing the stock markets won’t bring down cryptocurrency with it.