In this article we explain how the world’s newest pandemic, the coronavirus, is actually having an effect on the price of cryptocurrencies, albeit through a source which is usually not associated with crypto prices: the stock market.

stocks

How the Coronavirus is Affecting the Bitcoin Market

 

The stock market entered correction territory on ­Thursday, as all major U.S. stock indices (Dow Jones, NASDAQ, S&P 500) declined for the 6th consecutive trading day. A “correction” is defined as a drop of more than 10%, but less than 20%, which is coming off the heels of the highest levels the U.S. stock markets had ever seen. The market as a whole was down over 11-12%, making this the fastest that stock markets had ever entered correction territory; perhaps a worrying sign for things to come.

Though the crypto market shrugged off stock market losses for the first couple of days, by February 25th, cryptocurrencies were on the way down, shedding some $37.3 billion – or 13% – since then, leaving its performance relatively similar as the stock market’s. Some of the biggest losers over the past week include Ethereum (ETH) – down 15.6%, Bitcoin Cash (BCH) – down 18.3%, Bitcoin SV (BSV) – down 24.7%, and Tezos (XTZ) – down 27.3%. Bitcoin (BTC) itself was down 10.7% as of the writing of this article, falling firmly below the psychologically-important $10,000 mark, now struggling to get back over $9,000.

Of all the coins in the top 100 by market cap, the only coins to escape losses were predictably the stablecoins, such as Tether (USDT), USD Coin (USDC), and Paxos Standard Token (PAX). Most other coins suffered double-digit losses, with the few exceptions of the top 100 being Unus Sed Leo (LEO) – down 3%, Crypto.com Coin (CRO) – down 8%, and FTX Token (FTT) – down 7%. In all, it’s been a bloody week for the market as most gains incurred by a freshly-arrived “alt season” seem to have been erased, and Bitcoin has proven itself not to be the safe haven investment away from market tumult that investors had been hoping for.

Are the Stock and Crypto Markets Correlated?

For the first 5 to 6 years after the invention of Bitcoin, the answer to this question was definitively “no,” as BTC and altcoin prices followed their own paths, unaffected by the ups and downs of the stock market. Though the answer today still remains mostly “no,” Wall Street’s influence in the Bitcoin market remains on the rise, thanks to the creation of Bitcoin Futures markets like that of the Chicago Mercantile Exchange (CME) and Bakkt. As such, Bitcoin is no longer entirely immune to the ongoings of Wall Street, which places cryptocurrency in the highest of the high risk categories.

This means that during a correction, recession, or even depression, Bitcoin (and other cryptos) will be one of the first investments to be sold off. Until that point, however, Bitcoin has just moved on its own accord. It is also worth noting that the stock market has been on an upswing during the near-entirety of Bitcoin’s lifespan, with the worst of the recession, with the depths of the stock market lows occurring on March 2nd, 2009 — less than two months after Satoshi launched the Bitcoin Network.

There are a few ways of measuring the correlation between the stock market and the price of BTC. Since the price of BTC varies from exchange to exchange, it is hard to know what to use as a reference for its price. One way of measuring this against individual stocks and stock indices is to compare the performance of the Grayscale Bitcoin Trust (GBTC), which is a pink sheets investment vehicle backed by BTC holdings. According to the fund’s website:

“Grayscale Bitcoin Trust’s shares are the first publicly quoted securities solely invested in and deriving value from the price of bitcoin.

GBTC enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins.”

Though the security’s price is not directly tied to that of BTC, its movement is, meaning it can be used for comparative purposes. Looking at the price of GBTC compared to that of the SPDR S&P 500 ETF Trust (SPY) – a well-known ETF frequently used as a gauge of the overall health of the S&P 500 index, we can see very little correlation between the two since last September:

SPY vs GBTC 1 hour

Source: Yahoo Finance

GBTC, the lighter-colored line swings erratically with high volatility, whereas SPY, the darker line, has remained relatively stable in a bullish pattern (that is, up until the last few days of this month). However, when we look at a comparison of the two over the last 5 days, we can see that both are a bit more aligned in movement, with SPY falling 8% and GBTC falling 17%.

SPY vs GBTC 5 day

If not simply a coincidence (and we strongly feel it is not), this would suggest that at least some of the time (though still a small amount), the price of BTC does indeed correlate with the movement of the stock market.

Another way to compare BTC to the stock market is to use an asset correlation testing tool which delivers absolute values of correlation from a certain start date. A value of 1 means the two products always move in unison with one another, a value of 0.5 means they move in the same direction about half the time, a value of 0 means they never move together, and negative values indicate an inverse correlation (meaning when one goes up, the other goes down).

Since this tool is developed primarily to test the correlations between stocks and other financial products, we again use GBTC for our comparative tool. For points of comparison, we looked at the correlations between the Vanguard Total Stock Market Index (VTSMX, representing the entirety of the stock market), Bank of America (BAC), Visa Inc. (V), PayPal Holdings Inc. (PYPL), Apple Inc. (AAPL), and the Grayscale Bitcoin Trust (GBTC), since January 1st, 2016:

portfoliovisualizer com

Source: portfoliovisualizer.com

In the top row, we can see that the total stock market (VTSMX) is most closely correlated to Bank of America, followed by Visa, Apple, and PayPal. The correlation between VTSMX and GBTC is actually zero, suggesting not even the slightest bit of correlation. Interestingly, in the bottom row we see that GBTC actually has a slightly inverse relationship with BAC, and a slight correlation with PYPL. Almost no stocks we tested measured significantly above PYPL’s correlation with GBTC, which can be inferred to mean that Bitcoin simply isn’t swayed by the ongoings of the stock market.

What is Causing the Stock Market to Decline?

As shown above, the crypto market remains largely uncorrelated with the stock market; however, this does not mean that it cannot escape problems faced by the stock market. Only 7 days ago, Goldman Sachs chief global equity strategist Peter Oppenheimer warned clients in an email that “in the nearer term…we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high.” His words proved to be spot on as the stock market has now entered correction territory.

Echoing this prediction are words about the stock market’s recent decline by Allianz Chief economic advisor Mohamed El-Erian, who told Yahoo Finance’s The Final Round on Thursday, “It’s [the market] pricing in a significant economic slowdown and it’s pricing in corporates — especially the multinationals —being hit by both lower revenues and higher costs. And finally, it’s pricing in some de-leveraging… It’s not yet pricing in the worsening prospects for the economy and the corporate sector that I believe unfortunately will result from this coronavirus scare.”

Ongoing fear surrounding the extent of the economic damage potentially caused by the coronavirus is now being regarded as the catalyst for starting the reverse trend of stock prices. The rampant slowdown in productivity in China due to factory shutdowns and workers under quarantine being unable to perform business as usual will ultimately have a very real impact on sales figures, which will undoubtedly translate into lower quarterly earnings. This will likely have a ripple effect on earnings figures worldwide, regardless of whether or not the coronavirus significantly spreads into other countries.

What Happens Next?

Since it is highly likely that the stock market will continue its downtrend for the foreseeable future, the crypto market stands a good chance of following suit. Though it is not intrinsically tied to stock price movements, Bitcoin and other cryptocurrencies are in no way immune from the economic fallout that is likely to soon take place over the impact of the coronavirus. Therefore, it may be prudent to consider moving a portion of coins into a risk-averse asset, such as cash or a stablecoin, until the broader stock market has stabilized.

For now, it would appear that the coronavirus has dashed hopes of an alt season spring, and for the first time in the history of cryptocurrency, the stock market seems to be on the decline. Only after Wall Street has deemed stocks and equities to be in a full-fledged bear market will we begin to understand how cryptocurrency reacts in such a situation. If the correlative testing data above is of any indication, a bear market for stocks doesn’t necessarily equal a bear market for cryptocurrencies; however, Wall Street will likely have to shed itself of BTC holdings before the crypto market can truly be free from its institutional connections.