Days after Bakkt launched its platform for bitcoin futures, crypto markets have shed over $30 billion in value. All top cryptocurrencies have shed significant value, with bitcoin bottoming out at $8,000. The total market cap for all cryptocurrencies had been steady at the $250 billion level since July but due to the market-wide crash, the market capitalization has dropped to just below $222 billion.
Presently, there’s low volatility in the crypto market as bitcoin consolidates just below $8,500. While Tuesday’s bitcoin crash took traders by utter surprise, Fundstrat’s Tom Lee believes bitcoin will recover but there is one condition: US equities must take the lead.
The Unpopular Opinion
In a tweet on September 25, the Wall Street Strategist and Fundstrat Global Advisors co-founder Thomas Lee referenced his earlier forecast where he had stated that bitcoin price will surge but only after the macro outlook looked strong because bitcoin does not perform well when the macro environment is gloomy. He went on to say that if the S&P 500 soars to hit all-time highs and central banks continue with their dovish policies, then bitcoin will re-enter the bull market owing to increased liquidity:
“The downturn in #bitcoin followed the risk-off selloff in #equities. – reinforces our ‘unpopular’ opinion bitcoin does not do well in a ‘trendless macro’ environment. – New highs needed in S&P 500 before $BTC can blast off. Why? We think crypto is retail and thus, risk on.”
Bitcoin has been constantly touted as a hedge against economic turmoil. However, earlier this month, Lee claimed that bitcoin becomes attractive to investors when they feel optimistic about the wider economy, in this case, the stock market. During an interview with CNBC’s Fast Money on September 13, Lee claimed that bitcoin “may be ambidextrous” in that it may act as both a risk-on and risk-off asset.
Is There A Correlation Between Bitcoin And Stocks
Bitcoin has plummeted by 15% since Monday. The interesting part is that US equities took a nosedive right before this bitcoin downward move. Hours before bitcoin suffered the monumental slide, the US stock market suffered its biggest slump since August. While many believe there’s no correlation between the US stock market and bitcoin, senior market analyst at eToro Mati Greenspan said that this happening was a “really strange coincidence”.
The notion of bitcoin being correlated to the stock market has always been a hot debate in the crypto market. The recent steep decline in the US stocks was likely caused by negative sentiment from investors due to fears of the repercussions of the US-China trade war and also the impeachment inquiry of US President Donald Trump. These catalysts behind the stock market downtrend are unlikely to have triggered the huge drop in bitcoin as well. This is because global geopolitical tensions are bullish for bitcoin because it is seen as a safe haven.
In the same vein, last month, Pantera capital inferred that there’s no correlation between bitcoin and blockchain businesses to other traditional assets. In a letter published on Medium by Pantera CEO, Dan Morehead, assets like bonds and commodities were uncorrelated in the 1980s but now they exhibit high correlation to each other after investors learned about diversifying their portfolios. Bitcoin, on the other hand, is independent. In fact, the correlation between bitcoin and the S&P 500 is 0.
Bitcoin has outpaced the S&P 500 for a very long time now. Also, considering how the S&P 500 tanked by over 2% in August while bitcoin remained relatively stable, it’s safe to conclude that there’s no correlation between bitcoin and the US stocks. For that reason, Lee’s theory that bitcoin and the S&P 500 march to the same beat is really bold and needs further verification.
The bitcoin safe-haven asset argument has been growing with many industry experts claiming that bitcoin can hedge against economic uncertainties. The hard truth is, no one will know for sure until a collapse in confidence in fiat currencies or a recession actually happens.