Bitcoin reflects the sharp fluctuations in traditional markets this year, highlighting the tightening link between cryptocurrencies and major financial assets as more professional traders enter the digital finance arena.
The world’s largest cryptocurrency is increasingly tracking asset movements that affect other global markets. Correlations with US technology stocks, crude oil and government bonds have risen significantly over the past two years, according to a Goldman Sachs study.
Bitcoin is often at an almost locked pace with Nasdaq 100 futures – derivatives considered proxies for sentiment towards US tech giants – as markets fluctuated in the first weeks of 2022 with those of many traditional financial assets, the links between the two asset class attracts the attention of analysts and investors.
“Before the pandemic, bitcoin and other digital assets showed low correlations with traditional financial market variables – in fact, crypto was behaving like a completely different ecosystem,” said Zach Pandl, co-head of currency strategy at Goldman Sachs.
“But in the last two years, as bitcoin has become more widely accepted, its relationship with macro assets has strengthened.”
Fundstrat, a boutique research firm that reports on both crypto and traditional markets, told customers earlier this week that “cryptocurrencies continue to show a strong correlation with stocks.”
The Nasdaq 100 index of the largest companies listed in the technology-focused Nasdaq Composite on Wall Street has fallen about 11% so far this year, while bitcoin is up 18%. Meanwhile, a basket of unprofitable technology stocks, considered bitcoin as speculative investments, fell 23 percent.
An increasing number of hedge funds are now betting on cryptocurrencies, while Wall Street banks are offering their clients services such as borrowing and custody of digital assets, and high-frequency trading companies are becoming more active in space. At the same time, big digital asset professionals like Galaxy Digital and Genesis Trading play a much bigger role in a market that was once dominated by retailers.
The entry of large financial players into the market is one of the main reasons why bitcoin now acts more as a traditional risky asset, analysts and traders say.
The emerging behavior of bitcoin as an asset that investors buy when investors are optimistic about the economy, or sell when they are nervous, is also supported by research by Nick Metzidakis, head of quantitative research at digital asset specialist Tyr Capital.
“Bitcoin has been around for the last five years. . . is positively associated with the Nasdaq, effectively behaving as a “risky” asset, “Mecidakis said. “This connection is stronger than the beginning of 2020 and suggests. . . Bitcoin is considered a “risk game” or a “technology game”.
Mecidakis also found that the US Jobs Report, considered one of the most important economic data published monthly, also affects the price of bitcoin, as well as many other actively traded assets.
But analysts note that bitcoin price movements are often triggered by factors specific to the cryptocurrency itself or the digital asset market more generally.
Marcello Marie, chief executive of Singularity Dao, a cryptocurrency trading company, said the speed with which new bitcoin units, the so-called hash rate, are being mined, and the amount of dollar miners in reserve also affect the exchange rate. .
The influence of large bitcoin holders, known as “whales”, is still strong, as digital coin ownership is still very concentrated.
At the same time, regulation and potential changes in financial rules in large economies also act as strong drivers of the price of bitcoin, said Inigo Fraser-Jenkins, head of institutional solutions at AllianceBernstein. Bitcoin, for example, fell last May when Chinese regulators signaled repression against the use of digital coins.
“There is currently very little empirical evidence that bitcoin can act as a diversifier of inflation or capital risk. In fact, the bitcoin-to-equity ratio jumped in the early stages of Covid, ”said Fraser-Jenkins.
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