Cryptocurrency price volatility has always been the price of doing business when it comes to decentralized digital assets. However, these constant shifts in cryptocurrency prices may be prescient, as an increasing number of professional investment experts say that these fluctuations are indications of stock market investor sentiment shifts.
But you don’t have to take our word for it: look no further than the pages of The Wall Street Journal for evidence supporting this new trend. Financial research outfit The Leuthold Group told the WSJ it has been keeping an eye on crypto more assiduously as of late, looking for signs of speculative enthusiasm. Meanwhile, Forester Capital agreed, telling the Journal that bitcoin, in particular, has become a strong sentiment indicator for the stock market.
Fundamentals Take a Back Seat to Sentiment
Sentiment has always played a strong role in the world of cryptocurrency. Research has shown that it’s this sentiment that plays the strongest role between stocks and cryptocurrencies such as Bitcoin — and that fundamentals take a back seat to these more emotionally-driven indicators according to the WSJ. In fact, the early 2018 stock market correction saw the bitcoin/stock market correlation hit new heights.
Yet interestingly enough, the connections seem to be at their strongest not when stocks and crypto are trending up; to the contrary, these correlations only seem to happen while both are in decline. This means that this curious correlation has diminished as of late. Even today, with bitcoin and crypto stocks declining after a decision by Google to ban crypto-related ad sales, the Dow is in the green.
Not So Hungry for Risk After All
The Journal said that it’s usually telling when crypto investors, with their usually voracious appetite for risky investments, decide that they’re not so hungry after all for speculative and volatile assets. The knock-on effect of this cooling is a general asset value downturn, and it’s something that the WSJ feels may indicate cryptocurrencies are being cast in a specific role to play — one that older asset classes did in the past. One example given was the Dot Com Bubble burst spectacularly, leading innumerable internet startups to the chopping block — starting with the ones that were most speculative.
Yet despite the slowly gathering evidence, cryptocurrency’s emerging role as a stock price indicator has certainly proven to be a very controversial issue for many. The Journal fielded more than a few strongly-worded comments from CIOs, with the most common refrain being the absurdity of such a claim. Stock prices are much more grounded, the argument typically went, and are subject to real-world economic issues like inflation, interest rates, and corporate earnings. The point was also made that these sorts of topics are often not on the radar of crypto investors at all — though there’s also an undercurrent of disdain that traditional investors have for those who delve into cryptocurrency.
Just a Coincidence?
There’s an old saying that correlation is not causation. Just because one thing happens right after another does not mean that one was caused by the other — there’s always a chance that the two things happening at once are pure happenstance. This is one of the arguments that have been made against the idea that crypto markets are acting as an indicator for the stock market, and it’s something the Journal article deals with head-on.
There may be some truth in this analysis. Stock price selloffs triggered in the beginning of March 2018, for example, were largely motivated by the Trump Administration’s publicized plans for increasing tariffs on aluminum and steel, yet price drops in the crypto space were most certainly not due to any such trade news. Instead, any price fluctuations in bitcoin or other crypto coins can be directly attributed to possibilities of government regulation in some countries and outright bans in others.
The Final Word
So what’s the verdict? Is the cryptosphere somehow mystically attuned to the stock market, despite yawning ideological gulfs that often exist between crypto enthusiasts and traditional stock investors? It seems almost impossible to consider, especially in light of how evidence seems to point towards any “market indicators” being a case of correlation and not causation. It is, therefore, tempting to completely dismiss the notion outright and keep the worlds of cryptocurrency and traditional stock investing separate and very much unequal.
Yet there’s still a niggling sense in the back of the head that something is indeed linking these two otherwise completely disparate markets.As crypto markets become increasingly mainstream and more traditional investors diversify into digital securities, they bring their carefully-honed market senses with hem, often spotting trends that would never be detected by a less experienced investor only exposed to crypto trading. Knowing how cryptocurrency works makes these experienced investors half Jedi Master, half canary in a coal mine, and this could very well reinforce the idea that crypto can become a legitimate stock market indicator after all.