One of the main reasons why Bitcoin, and other top cryptocurrencies such as Ethereum, have become more popular for institutional investors is the notion that they are uncorrelated with other assets such as stocks.
However, after a nasty Black Friday for pretty much all major asset classes and global stock indexes today following the negative news of a new South African covid mutation, where Bitcoin performed just as poorly as most other assets and natural resources, one could ask if it demonstrates that this is no longer true. If so, is it the adoption of crypto-currencies by such investors itself that is the reason why Bitcoin now appears to be more correlated with the market?
Let's have a look and discuss.
All big financial assets plummeted in value this Black Friday following the news Thursday evening about a new covid variant in South Africa. Bitcoin was no exception image source
Another covid-crash
First of all, let's understand why the markets, as well as Bitcoin, fell so much today, as it is all related to the same news. With many European countries seeing new record levels of covid-cases in recent weeks, the fear of governments needing to enforce more restrictions yet again to protect the population has again been looming (or in some cases like Austria, already happened). To then have the news of a new and potentially more contagious variant discovered (and now also already reported in Belgium) has blown the fear indexes straight through the roof.
Immediately this morning, European airlines went down by double digits while more or less all common industry stocks such as big European banks and Oil and gas companies went down approximately 5 percent. The reason is obvious: The markets have priced in an assumed reopened economy with perhaps some light, local, and temporary restrictions here and there throughout winter. Now, on the other hand, there are good reasons to believe that we will have at least severe reductions in travels, and perhaps also another round of large-scale lock-downs.
One way or the other, we should not expect the same levels of economic activity in the next few months as would be the case without this new covid variation.
Institutional money withdraws
As a knee-jerk reaction, markets then begin to liquidate immediately. Sensing the risk of holding onto assets that would now expect lower profitability (which should theoretically include the vast majority of companies perhaps with the exception of tech and green companies who May benefit from a variety of factors), as well as the opportunity of buying such assets back cheaper, should there now be a correction, sales are made quickly to obtain a stronger cash position.
But it's not only stock markets that have been immediately affected, Oil is also down 11.5% as of now. A drop I don't believe we have seen in a single day since spring last year.
Bitcoin following the markets down
There was a time where Bitcoin was not only considered uncorrelated with other assets, but as a hedge against traditional finance and typically going up during uncertainty (such as following the Brexit vote in the UK). This has been one out of two main reasons why institutional investors have argued in favor of including Bitcoin in their portfolios (the other one obviously being its performance). It was then assumed that when traditional financial markets performed poorly, Bitcoin would either be unaffected or potentially even go up in value in the face of financial uncertainty.
Today, however, Bitcoin plunged down ~7.5% within the same hour of the European markets opening up in the same negative direction. Institutional investors have largely been credited with enabling the last surge in Bitcoins price from ~$10,000 - $60,000. But apparently with their pumps comes their trading behaviors. So now that, for better or worse, Bitcoin is better established in such portfolios, and managed in a similar way by a significant portion of the holders, it is likely that Bitcoin will follow the overall markets more closely during "extreme events of uncertainty" (when traders tend to prefer holding cash and watching what will happen next and/or look for a better buying opportunity after a fall).
Thus, the very act of institutional investors to buy Bitcoin in order to diversify their portfolios, may very well itself have caused Bitcoin to be less potent as a diversification.
Bitcoin's long term journey
Long term, I don't think it matters much. Traders will cause new ATHs with their greed, and new steep valleys with their FUD and negative emotions. Meanwhile, more and more people are still looking to buy and hold Bitcoin, making the valleys bottom at higher and higher points while steadily going up over time.
However, it may cause some short to mid-term skepticism and lowered demand from traditional investors looking to diversify their absurd stock gains from the past 1.5 years into uncorrelated assets when they see Bitcoin fall just as hard as the market on negative news.
What will they buy instead? Farmland? Whiskey? Pokemon cards? I'm curious to hear what you think in the comments :)
Fredrik