- Cryptocurrency Correlation to stocks has increased since Covid
- Macroeconomics matters to cryptos
- Crypto Exposed Stocks – Microstrategy, Bitfarms, Marathon Digital, Riot Blockchain
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Cryptocurrency Correlation to stocks has increased since Covid
Since the Covid crisis first hit financial markets in Q1 2020, Bitcoin has been increasingly dictated by macroeconomics, which has been exacerbated by the rise of institutional involvement in the space. As the chart below (Figure 1.) shows, the correlation between the Nasdaq 100 and Bitcoin has been steadily increasing in recent years. In other words, cryptocurrencies trade more like a risk asset and when stocks rise, cryptos will also tend to move in step and vice versa when stock markets sell off.
Figure 1. Bitcoin/Nasdaq 100 Correlation
Source: Refinitiv Datastream, DailyFX
Macroeconomics matters to cryptos
Just as MMT (Modern Monetary Theory) policies used in 2020 had been a key factor in sending cryptocurrencies to the moon. The subsequent inflationary shock, which has since seen central banks respond by aggressively withdrawing stimulus, has been equally influential in sending cryptos crashing back to earth. Long gone is the notion that cryptos are an inflation hedge, into the acceptance that Bitcoin is essentially a high beta proxy for the Nasdaq 100. It’s no coincidence that cryptocurrencies peaked close enough at the moment when the Fed- chairman Jay Powell removed the description that inflation was transitory. Again, this further emphasizes the point that when trading cryptocurrencies, more so the heavyweights like Bitcoin and Ethereum, macroeconomics are important. Therefore, it is important to understand the risk sentiment in the equity area. In layman’s terms, markets are risk-on when stocks rise and risk-off when stocks fall.
Figure 2. Bitcoin Chart: Daily Time Frame
Crypto Exposed Stocks
As with most financial assets, traders can trade an asset either directly or indirectly via a derivative. For example, if I was bullish on oil, I could choose to go long energy stocks, or if I was bearish on the S&P 500, I could consider selling AUD/JPY. This can also apply when trading Bitcoin specifically, not shiny objects such as alt-coins.
The table below shows a list of crypto-exposed stocks where exposure to crypto comes from either being a Crypto miner or a Crypto holder via treasury holdings.
Figure 3. Most exposed stocks to Bitcoin
That said, and as shown in Figure 4., when trading crypto-exposed stocks, it is important to be aware of the negative feedback loop that can occur. Just as these stocks can outperform the underlying asset, they can also significantly underperform.
Using Microstrategy as an example, in times of market distress, not only do you sell off the stock due to a risk-off sentiment, but due to its exposure to cryptocurrencies, this leads to a worsening of the sell-off in the stock. Looking back at the three biggest one-day percentage drops in Bitcoin this year of 22.7% (June 13), 16.5% (May 9), and 10.4% (January 21). The micro strategy fell by 25.2%, 25.4% and 17.8% respectively, underperforming Bitcoin by 6.2%. But this is to be expected due to its beta to Bitcoin being above 1.
Figure 4. Max Drawdown
- It is important to understand where we are in the economic cycle. Cryptocurrencies are risky assets and therefore need stock markets to rise and central banks to loosen monetary policy. Macroeconomic Questions!!
- Crypto-exposed stocks may outperform Bitcoin when the good times roll. But times of market distress can lead to a negative feedback loop.
- Microstrategy is the most notable crypto-exposed stock.
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