Bitcoin Crashes in Lockstep With Equities
Bitcoin is not an asset class that should be correlated to stocks
Not at all.
Yet, this week, as major stock indices fell by between two and four percent, Bitcoin followed suit. Along with all major cryptocurrencies. Bitcoin, of course, a more volatile asset, fell by around fifteen percent from Wednesday until Sunday. At one time, Bitcoin had dropped to below $43,000 from Monday’s price of $57,000.
So, why did stocks tumble this week? One reason for sure is the poor jobs report that was released this week. In spite of the US unemployment rate dropping to 4.2%, the economy added only 120,000 jobs in November. Monthly average gains this year have been over 500,000 jobs per month. Disappointing. The labor force participation rate in the US is still at only 61.6%. Very disappointing.
The omicron variant of the coronavirus? Yep, that surely was a reason for investors to be bearish on stocks this week. In fact, Jim Cramer called this week “The Omicron Selloff.” With the possibility of nations shutting down their economies again, it’s understandable that investors might be wary. And what would that do to the already serious supply chain issues we’re having in this country? Interruptions in supply lead to lower sales and yes, lower Earnings Per Share. Like Larry Kudlow always says, “Earnings are the mother’s milk of stocks.”
But why Bitcoin?
There are a lot of theories whenever Bitcoin sells off rapidly like it did this week. For one, Bitcoin’s November futures expired this week, so that always causes volatility, and many times some selling pressure. How about inflation fears? That should be a “Buy” signal for Bitcoin. Not a good reason to sell.
Leverage on Bitcoin was relatively high. So that’s when a lot of positions get liquidated. The slightest bearish news can cause a domino effect of Bitcoin liquidations. In addition, the likelihood of a spot Bitcoin ETF approval before year-end is diminishing rapidly.
Probably more apparent to traders is that the likelihood of Bitcoin reaching $100,000 before year-end looks pretty slim. A lot of slightly bearish factors for Bitcoin, that when put together, can cause a massive selloff.
I’m old enough to remember March of 2020, when equities, Bitcoin, and other cryptocurrencies sold off, fast and hard, in lockstep. Was there any rational reason for crypto and equities to be so closely correlated? Of course not.
Fear.
That’s the reason most assets sell off. Fears about the economy, inflation, earnings, all of these spell trouble for stocks. Should they affect Bitcoin in the same manner? Of course not. There’s only one logical explanation as to why Bitcoin often behaves in lockstep with equities:
Bitcoin is so misunderstood.
And, we are so early.
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Issue No. 33, December 5, 2021. Bonus Issue!
Rick Mulvey is a CPA, forensic accountant and crypto consultant. He writes about all things Bitcoin, and yells at the Yankees and Giants. He also runs marathons and makes wine, neither professionally.
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