This week, the US stock market deleted all of its gains made in 2018 amidst a major sell-off. The crash had no impact on the crypto market, showing no signs of inverse correlation.
Possibly affected by the trade war between China and the US along with the increase in Fed rates, the US stock market suffered one of its worst short-term crashes in recent history.
Analysts stated that Asia markets are more vulnerable than the US if the stock market crash of the US is to intensify, given the gradual decline in the growth rate of China’s economy.
“Then, there are worries about what’s happening abroad. China, the world’s second-biggest economy, is showing slower growth. Last week, it reported economic growth of 6.5 percent in the third quarter, falling short of expectations. And it has been drawn into a trade dispute with the U.S., with each side digging in on tariffs on billions of dollars of each other’s imports,” CNBC investing editor reported.
Cryptocurrencies like Bitcoin and Ethereum possess fundamentally different catalysts that affect their prices on a regular basis in comparison to the global stock market and traditional assets.
Similar to gold and other types of precious metals, the value of the crypto market solely depends on the supply and demand within the market, unaffected by the performance of the global economy.
Hence, the instability of the Chinese yuan and US stock markets, in theory, could positively affect the cryptocurrency market if investors in the traditional finance market utilize cryptocurrencies to hedge their holdings with an asset class that remains unimpacted by the slump of the global finance market.
Analysts expected the cryptocurrency market to increase in value more so when reports were released that Asia markets are likely to suffer a harder crash than the US stock market in the days and weeks to come.
Kathy Lien, managing director of FX strategy at BKAM, stated:
“It’s not in an environment of positive growth trend so the pressure will be exacerbated in the emerging markets compared to the U.S. market. Unfortunately this is the beginning. I think that when we get sentiment shifts like these, they always last longer than we would like to see and we could see the selling continue for some time.
The vulnerability of Asian markets is relevant because the majority of over-the-counter (OTC) trading in the cryptocurrency market is said to be settled during Asian hours, primarily due to the presence of large mining facilities.
“One of the biggest criticisms of crypto by institutional investors has been the volatility. Over the last four to six months, the market has been trading in a very tight range, and that seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space,” Bobby Cho, Cumberland’s global head of trading, said.
Lack of correlation is not equivalent to inverse correlation, and there exists no clear trend which suggests that the struggle of the global finance market leads to a positive price movement in the crypto market.
However, in the upcoming years, as the cryptocurrency sector becomes more appealing to institutional investors, digital assets could become a viable alternative to gold and other traditional stores of value.
Featured image from Shutterstock.
Last modified: May 20, 2020 2:34 PM