Bitcoin,  Commentary,  Opinion

Opinion | The Dip in Bitcoin Price Was Caused By Correlation With The Stock Market

The reasons behind the largest cryptocurrency asset moving closer with the S&P 500 and Dow Jones

via Coinmarketcap, 7 day BTC/USD chart

Bitcoin hit a price of $42,874.62 early this Saturday morning. The largest cryptocurrency asset has not seen prices like this in nearly two months, and nonetheless in a 12% decline overnight. While many fear this to be a sign of an impending bear market, it is nothing more than a shakeout influenced by the recent decline in the stock market.

Stock Market Pressure

In recent weeks the stock market has seen selloffs of billions of dollars from billionaires like Elon Musk and Jeff Bezos. This is because the Biden administration is imposing a surtax on multimillionaires and billionaires. The tax is 5 percent on households making $10 million or more, and 8 percent on $25 million. Predictions indicate that the tax could make over $200 billion in revenue. The administration hasn’t imposed the tax yet, so many are selling off assets so they can get a cut on that tax, leading to a downtrend in the market.

Continued panic over the Omicron strain of Covid-19 is another contributing factor to price decline. Several countries have limited travel and are placing additional restrictions. This has caused more market panic, which has led investors to sell off some of their stocks, making this a contributing factor for the -1.95% decline in the S&P 500 over the last five days. 

To top it all off, Wall Street had a bad day on Friday as it actually opened higher, but quickly fell to red. The jobs report released Friday states only 210,000 jobs were added to the US economy during the month of November, which helped contribute to this fall in price. Economists expected that more than double this number was going to be added to the US economy, so this was a disappointing blow to the market. 

At first glance, this all seems to be bad news, but looking a little deeper, there is bullish news hidden in these headlines. The unemployment rate dropped to 4.2%, which is the lowest it has been since the start of the pandemic. Even though November’s numbers did not meet expectations, The United States has additionally added over one million jobs to the economy over the last three months.

Tension remains high among investors as they await the inflation report. Further news on the Omicron variant and how countries globally will impose restrictions will also have a major effect on the market.  

How Bitcoin is viewed as an asset

Bitcoin, and the idea of cryptocurrency as a whole, is increasingly moving into the mainstream. As recently as five years ago, BTC was largely viewed as a fringe investment and one that held little to no value. That is no longer even remotely the case. Many of the biggest hedge funds and billionaires have added at least some BTC to their portfolio in recent years. Some have gone as far to endorse it, or add some form of cryptocurrency payment as an integral part of their business. For instance, over two years ago the Dallas Mavericks, the basketball team owned by Mark Cuban, started accepting Bitcoin as a form of payments for tickets and merchandise. That isn’t even scratching the surface of the amount of sports franchises and other companies that have begun integrating Bitcoin and other crypto into their business models

In the past, Bitcoin’s market has been compared to that of gold. They both did not necessarily move with the rest of the market, and were a good way to hedge against bad economic news in the United States. Now, all of that has changed. Institutional investors take away a lot of the individual power that retail investors used to have by now investing large sums of money into BTC. This inevitably will lead to closer correlation with the prices of the stock market, as many of the big players in Bitcoin are now also big players in the stock market. 

Proof of correlation

The NASDAQ, S&P 500, and Wilshire 5000 all saw weekly declines in price. When examining the price dips on the chart of BTC more recently, they are strikingly similar to that of the market index funds. Bitcoin is more volatile of an asset, so the dips and gains are often larger, but the overall movement of the charts has become more similar over the last month. Bitcoin saw a decline of over 10% in the last day, dropping to a nearly 2 month low of $42,000. While the market index funds didn’t see dips of that size, which would be extremely alarming, they did see declines in price. Big commercial investors removed key supports in the $50,000 and $47-49,000 range. When big corporations and hedge funds start to hold large parts of an asset, they are able to change the price like this. Retail investors alone cannot cause a price change this big, and it is foolish to think so.

One purpose of this massive BTC dip was to shake out all the retail investors who had made a long leverage for BTC when it was around the $53-58,000 price. Not to mention those who sold their spot positions at a loss out of fear. There were those who benefitted immensely from this shakeout of hundreds of millions, while there were also losers. If this dip is to tell investors anything, it should be to watch the stock market closely, because there is definite correlation at this point with the price of BTC.

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Elijah Pollack is editor-in-chief of Modern Consensus. He has previously co-hosted the Audible podcast Extra Credit. Elijah has published work in the past for Book and Film Globe and The Observer.