In a sudden turn of events, the Dow Jones Industrial Average has slipped nearly 800 points or a little above 3% this Wednesday. This was seemingly triggered by a recession signal from the 10-year Treasury bond yield that fell below 2% for the first time.
Additionally, the S&P’s 500 fall of 2.9% and Nasdaq’s fall of 3% seems to have triggered a mass sell-off of experimental assets like Bitcoin, causing it to crash below its 100-day moving average.
Is Bitcoin That Independent From the Dow Jones?
With prices of many stable cryptocurrencies destabilized temporarily, a tantalizing theory has been making the rounds across social media platforms and the crypto-community in general. Perhaps the stability of Bitcoin is more closely related to the global macroeconomy than what economists had previously thought.
This correlation between Bitcoin and the mainstream economy harkens back to suggestions made by many independent economists, where they insisted that Bitcoin’s price rallies were somehow influenced by the Chinese national currency, the Yuan (CNY).
U.S. equities market plunged overnight (Dow Jones down 3% in a single session).
There's obviously no correlation between bitcoin and the global equities market [yet].
But still worth considering the theory put out by Cathie Wood in Dec 2018.https://t.co/Bafm89yScC
— Joseph Young (@iamjosephyoung) August 15, 2019
There were many instances in 2016 where Bitcoin prices shot up just before the devaluation of the CNY. However, there are also times where the Bitcoin price stabilized following a deflationary correction in CNY prices.
Now, with the entire cryptocurrency market down just over 5% in the last 24 hours, and many digital assets experiencing losses over 10%, the theory is picking up additional momentum.
Using Crypto to Hedge
The current sentiment among analysts is that investors use Bitcoin as both a risk-on investment in the west as well as a risk-off hedge by investors in the east. Back in December 2018, global economies that were increasingly employing quantitative easing fueled the risk appetite of investors, which could be what led Bitcoin’s meteoric rise from $3k to $9k and beyond.
Similarly, on when the US stock markets fell on Wednesday, investors sold their stocks in companies and scrambled to buy into bonds. If the theory holds, the sinking Bitcoin price is an indicator of US-based investors selling off their riskiest speculative investments (i.e., cryptocurrencies) to buy into less volatile assets.
It is important to note that the real reason investors are spooked is because of the inversion of the 2-year /10-year yield ratio curve of the bond market— a first in the last decade. This indicator has always preceded an economic recession, like when the yield curve was inverted in 2005, The Great Recession of 2008 followed just two years after.
What is your opinion? Are Bitcoin and other assets largely affected by the macroeconomy, or do they stand apart from it? Let us know in the comments below!
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