Posted on Jan 6, 2022, 11:40 AMUpdated Jan 6, 2022 at 6:48pm
When two speculative bubbles (Gafa and cryptos) collide, the plunge risks aligning with the irrational exuberance of the past. A correction in major US tech stocks led to a more techno-currency, cryptocurrency, which was valued very exorbitantly a year after the banner. Far from being a defensive asset for protection, bitcoin and cryptocurrency are risky growth stocks.
Bitcoin ($42,920 or €38,000) and cryptocurrencies are having a chaotic start to the year compared to January 2021, when the market leader experienced a sudden crash of 20% and a sharp increase in volatility. The top 30 cryptocurrencies are losing between 8% and 16%. Ether lost 10 percent to $3,425 (3,030 euros).
Bitcoin resists better than others and produces 8%. On CNBC, hedge fund manager Mike Novogratz of Galaxy Digital said that bitcoin could drop further to the $38,000-$40,000 region before starting to rebound.
On Twitter, crypto star Sam Bankman-Fried, founder of FTX platform and trading company Alameda Research, asked, “What are you doing in a bear market?” I fell back very quickly. “I’m not saying we’re currently in a bear market.” As one of the top traders in the market, Sam Bankman-Fried is not supposed to be very publicly candid about his sentiment towards the market. “The correction is not limited to cryptocurrencies, and perhaps stocks are leading the way.”
Relationship with Nasdaq
There was a time when cryptocurrencies lived in their own world, isolated from other asset classes. This is no longer the case and they did not appreciate the Fed’s hardening tone,” comments on Twitter Jens Nordvig, founder of Exante Data. Over the past 20 sessions, bitcoin has seen increased correlation with the US tech stock market.
Thus, the 3.3% decline in US technology stocks on Wednesday had an impact on cryptocurrencies, the 2.0 coins of the new digital age. Bitcoin tracks the most speculative component of the US stock market with an amplifying effect. The Apple group alone ($3 trillion) weighs half the size of the entire crypto market ($2 trillion). The Gafa dive has a rebound effect on cryptocurrencies. Since 2011, bitcoin has gained an average of 230% each year, ten times more than the US tech stock market, Nasdaq (+20% annually).
With the development of financial products indexed on cryptocurrencies, listed in the United States, and the arrival of new American institutions (hedge funds, etc.), Wall Street is taking the lead in the evolution of global cryptocurrency prices.
Over the past seven days, selling pressure on Bitcoin came mainly from US investors, while Europeans and Asians were the most buyers. This composition corresponds to the previous year.
In the first half of 2021, Bitcoin recorded its strongest performance (44%) when Asian markets were open and declined (-12%) when US markets took over, according to Morgan Stanley. In 2020, it was the opposite: America bought bitcoin on a large scale.
4% of Americans have quit their jobs in the past 12 months thanks to their earnings from cryptocurrency trading, according to a survey by CivicScience. Two-thirds of them earned less than $50,000.
51 countries ban encryption
At the end of 2021, 51 countries banned cryptocurrencies, up from 23 in 2018, according to the Law Library of Congress. Of the 197 countries recognized by the United Nations, one in four countries is still closed to Bitcoin and cryptocurrencies.
9 countries (Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia) have declared the use of cryptocurrency illegal and 42 prohibit their banks and financial institutions from working on cryptocurrencies. Among them are most African countries such as Ivory Coast and Gabon, as well as Saudi Arabia, Bolivia, Lebanon, Indonesia, Kazakhstan, Macau and Turkey.
loss of independence
Since the beginning of the COVID crisis, the correlation between the prices of 80 major cryptocurrencies in the market has increased according to studies (1). They tend to move in the same direction and their performance gaps have narrowed.
In times of stress, cryptocurrencies are also increasingly connected to traditional financial markets. Cryptocurrencies are less able to offer diversification and protection than gold. The researchers note that “in 2018-2019, the cryptocurrency market was largely independent of the development of traditional financial markets.”
The correlation between Bitcoin and the CAC 40 index strengthened during the Covid-19 crisis. It has increased to 65% since 2015 but increased to 96% between February 17 and March 18, 2020,” as noted by the Financial Autorité des marchés in its “Mapping Markets and Risks for 2020” report.
Covid era reforms
Since the Covid crisis, bitcoin has gone through five correction stages that lasted between 21 and 73 days to declines between -75% (March 2020) and -27% (January 2021), according to data from CryptoQuant. The new patch, which began in early November, has already lasted for about two months. Bitcoin plunged 20% in December, its worst year-end since 2015.
(1) “The Consolidation of the Cryptocurrency Market in 2020-2021”, Jaroslav Kuapin, Marcin Waturik, Stanislav Drozdz