crypto strategy

Crypto’s Correlation with Traditional Finance Could Soon Lead to More Bleeding

There is no denying that the crypto market has faced obscene bearish pressure over the past eight months. Despite this, September was particularly turbulent for the industry, with Bitcoin (BTC) price dropping below the all-important psychological $20,000 threshold before forging a comeback.

While these declines have called into question the status of the asset as digital gold and inflation protection, a key question worth considering is how deeply intertwined the crypto market is. to the global economy.

At this point, historic inflation figures pushed the price of everything under the sun – from fuel to food – to record highs. And, despite the S&P 500, a stock index that tracks the performance of 500 major publicly traded companies in the United States, falling year-to-date (YTD), its performance outperformed the crypto market by a decent margin.

Charmyn Ho, Head of Crypto Information for cryptocurrency exchange Bybit, pointed out to Cointelegraph that, like any other market, the crypto industry is currently subject to volatilities caused by macroeconomic factors, adding:

“It is entirely fair to say that the global financial landscape has put pressure on Bitcoin prices. With continued pressure on liquidity from quantitative easing and uncertainty, investors tend to shy away from risky assets, which in turn limits any bullish momentum in the crypto market.

Regarding the recent rally above $20,000, Ho noted that it was either a trend reversal – after a recent confluence of on-chain metrics hinting at a bottom formation – or just a temporary attempt. flush out excessive leverage, it is still too early to tell. Reflecting on historical data, she believes that the extended duration of BTC’s current dormancy may indicate the formation of a reliable price floor, which may help pave the way for the next uptrend.

Is Crypto’s Link to the Global Economy Now Inextricable?

Ajay Dhingra, Head of Research and Analytics at Crypto Exchange Unizen, told Cointelegraph that rising inflation has significantly reduced investors’ risk appetite for crypto and weakened the global economy to a crawl. point where Bitcoin was unable to deliver on its promise of a safe haven. against inflation. This is largely due to its high correlation with the stock market and its unpleasant volatility.

He added that while the future remains as bright as ever for blockchain technology, due to the crypto market’s ever-closer tie to the wider economy, there could be even more pain for short-term investors. Dhingra noted that consumer sentiment always dictates any market, adding:

“Right now, the world is going through a massive crisis because of the war in Ukraine, rising prices and weak economic activity, which has irritated the retail sector. But in the long run, the innovation brought by blockchain technology will inevitably break the correlation.

In Ho’s view, the existing correlation is likely to persist. However, it is difficult to predict its magnitude since the recent economic downturn has impacted investors and traders around the world in unimaginable proportions.

Likewise, she pointed out that the prevailing macroeconomic conditions have had an unprecedented impact on the market sentiment of risky and risky investments, adding that if the economy experiences a further decline, investors at all levels will continue to lay off assets. like crypto and move towards fiat-centric offerings like government bonds. She added:

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“I think with the growing popularity of cryptocurrencies, links between traditional finance and crypto-economy can certainly be made. However, these two still retain some form of independence from each other. each other, as they have very different characteristics and uses.

Frederic Fernandez, the co-founder of DEXTools – a blockchain data aggregation platform – believes that even though economic conditions in different markets affect Bitcoin quite heavily, when the dust finally settles, not only will people understand the benefits of crypto as a safe haven against the traditional financial sector, but the market as a whole could see a solid uptrend. He added:

“The big players are now also in crypto and building their future portfolios, they are taking advantage of this market to create good strategies for their funds and their clients, but it will take time to see the consequences when the market is more mature.”

What Happens Now for the Crypto Market?

Despite Bitcoin’s rally over the past few days, many analysts believe that it is highly unlikely that the currency – as well as the crypto market as a whole – will be able to muster the kind of momentum it has. need to overcome this boring phase at any time. in the foreseeable future.

For example, Akeel Qureshi, chief marketing officer for decentralized finance (DeFi) protocol Hubble Protocol, told Cointelegraph: “According to Bitcoin maxes, this is the environment the asset was meant to thrive in. Although this theory was formulated long before players like JPMorgan bought into it, right now there just doesn’t seem to be much good news on the horizon,” adding:

“Bitcoin is tied to Federal Reserve policies.”

He noted that while Bitcoin has long been touted as an inflation-resistant asset — a narrative that holds true depending on when one bought the token — at the moment, it is seeing price declines, especially as the labor market continues to weaken.

Qureshi, however, said that not all cryptocurrency prices are as inextricably linked to the global economy as Bitcoin. He believes Ether (ETH) has already started to pull out of BTC ahead of its long-awaited merger to a proof-of-stake consensus model, which is expected to take place next week, adding:

“This potentially heralds the so-called ‘turnaround’, where ETH’s growth begins to outpace that of Bitcoin. Meanwhile, active traders are finding good opportunities among altcoins and smaller cryptocurrencies across the wide range of blockchains and decentralized networks that currently exist.

Finally, he noted that the stablecoin market remains incredibly strong regardless of rising interest rates, as it is still impossible to find a bank that can provide an interest rate on cash above inflation. in force. “In decentralized finance, this is possible on stablecoins backed by the US dollar. As such, for those willing to explore, crypto offers limitless opportunities.

Could a trend reversal be possible for BTC?

According For some analysts, the recent drop in crypto prices was not spurred by rising inflation, but by soaring interest rates which were raised to help eliminate excess liquidity on the market. market, fight inflation and strengthen the US dollar. In addition, higher interest rates also equate to better Treasury yields and increased investment by buyers of foreign bonds. Therefore, a short-term trend reversal may be difficult, but not impossible.

That said, over the past decade, Bitcoin has significantly outperformed most stocks while gaining mainstream acceptance by many mainstream finance entities. Investment giant BlackRock recently started pumping its client’s money into the digital asset, suggesting a potential boost to the future of crypto. Also, it should be noted that the last time BTC fell below $10,000, it quickly hit an all-time high of $69,000.

Finally, some experts believe that Bitcoin may soon continue to lose its strong correlation with the stock market, pointing out that over the past 14 days people have been selling on the S&P 500 while BTC has gained almost 10% in value. Another thing that seems to favor Bitcoin is that major fiat assets such as the Euro, British Pound, and Japanese Yen are at all-time highs against the US Dollar.

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On this point, Ben Caselin, vice president of global marketing and communications for the AAX cryptocurrency exchange, Told Forbes that there is currently a very strong relationship between the price action of the US Dollar and that of Bitcoin, adding that if the Dollar has shown decent strength during the second quarter of 2022, any pullback could spur a rally for Bitcoin to short term.

So, as we head into a future fueled by financial uncertainty, it will be interesting to see how things unfold for the crypto market, especially as there appears to be little respite from from the traditional financial front anytime soon.