Don’t Blame Tesla or Crackdowns for Bearish Bitcoin Market, Blame Covid-19

However, while there’s little doubt that such developments have played a role in shaking the market, there’s arguably one other factor that has had at least as big an impact. This is Covid-19 and its economic fallout (e.g. threat of rising inflation and interest rates), with both recently combining to unnerve markets. By unsettling markets and investors worldwide, Covid-19 has severely dampened investor demand for high risk-reward assets such as bitcoin and crypto.

As such, we’re likely to see a subdued market for as long as investor confidence remains low. But while this may be taken as bad news, bitcoin’s apparent correlation with traditional stock markets should be regarded more positively, as a sign of its (gradually) increasing predictability and mainstream-ness.

Covid-19 Is Responsible For Crypto’s Recent Declines

Case in point: bitcoin and the wider cryptocurrency market suffered one of its worst 24-hour falls of the year on July 19, and so did major international stock markets.

As of writing, bitcoin has fallen by 5% in 24 hours, while the cryptocurrency market as a whole has fallen by 7%. Some altcoins have fallen even more steeply, with Binance coin, cardano and polkadot, for instance, dropping by more than 10%.

Over the same day, stock markets worldwide fell in response to fears that rising Covid-19 cases may derail the globe’s economic recovery. In the US, the Dow Jones recorded its worst loss since October, while the S&P 500 dropped by 2%. In Japan, the yield on the government’s 10-year bond fell to a six-month low. And in the United Kingdom, the FTSE 100 suffered its worst fall in two months, with its 2.3% slide taking £44 billion (c. $60 billion) from its value.

Clearly, the cryptocurrency market is no longer rising and falling in a self-contained vacuum. It’s affected by the sentiments and moods of mainstream as well as crypto-focused investors, and significant developments and events can alter its level.

Indeed, this was brought painfully home back in March 2020, when bitcoin fell as low as $4,000. Covid-19 fears and investor confidence were again the culprits, with the Dow Jones having its worst day since 2008, and with other markets also falling dramatically.

Needless to say, bitcoin and crypto’s falls were more severe and more sustained than those suffered by traditional markets, as they were yesterday. Still, this is to be expected given the immaturity and volatility of the cryptocurrency market.

Numerous mainstream traders and analysts have warned investors away from both stocks and bitcoin/cryptocurrency in recent weeks. This is largely because renewed Covid-19 worries and a general overheating of world markets makes this a risky time to get involved in high-risk, high-return assets.

For example, veteran investor David Tice — who famously sold his Prudent Bear Fund during the 2008 crisis — has recently suggested that it’s a “very dangerous period” for investors at the moment, with stocks and bitcoin alike set to fall.

As he told CNBC, “The market is very overpriced in terms of future earnings. We are adding debt like we’ve never seen. We have the Treasury market acting very strange with rates falling dramatically.”

Likewise, Fundstrat’s Tom Lee has suggested that rising coronavirus cases may cause an S&P 500 correction in the coming weeks, with investors losing confidence as case numbers rise. Wells Fargo warned in early July of a “day of reckoning” for tech stocks, one likely to be instigated by the Federal Reserve increasing interest rates in response to rising inflation.

Crypto As An Amplification of Stock Market Exuberance/Despondency

While the stock market certainly hasn’t crashed, it seems highly likely that various dips over the past few months have been projected into the cryptocurrency market. Again, these dips have either been directly or indirectly caused Covid-19, insofar as inflation and the threat of increased interest rates (which are ultimately part of the economic response to the coronavirus pandemic) have spooked markets.

For instance, on July 7 the Dow Jones lost 250 points, dragged down by worries that the international economic recovery may be faltering. On the same day, bitcoin slipped from nearly $35,000 to $32,500.

Source: CoinGecko

And on May 12, the Dow Jones fell by 700 points, which at that point was its worst fall since October. May 12 was the very day the bitcoin market began its current slide back down to $30,000, with the cryptocurrency losing roughly 7% in a single day.

Another interesting co-occurrence fell between June 16 and June 18, when the Dow Jones dived in response to the Federal Reserve warning that interest rate rises may have to come sooner rather than later (t0 curb inflation). During this period BTC fell from $40,000 to just over $35,000.

And so on. Basically, the point here is that wider market sentiment is having a neglected — and large — impact on the cryptocurrency market. Covid-19 — and the wider effects of the Covid-19 pandemic (inflation, rising interest rates) — have begun to rattle investors, who as a result have lost their willingness to enter high-growth (and high-risk) markets such as bitcoin and other cryptocurrencies. (In this respect, it’s worth pointing out that gold has risen in value since the end of June.)

This arguably means that we can’t seriously expect bitcoin and other coins to significantly pick up again until the economic picture improves. For now, a gradual erosion in investor confidence is resulting in a gradual erosion in bitcoin’s price, and it’s only the restoration of confidence that will cause this price to climb upwards once again.

On the brighter side, the fact that cryptocurrency prices have increasingly taken their cues from the stock market (in recent months) should be enough to silence critics who’ve long claimed that “every price change is fully explained by internal market issues.” While crypto certainly still has its problems, the recent parallelism between cryptocurrency and the stock market shows that crypto is being normalized, and that mainstream investors are gradually accepting bitcoin and other cryptos as legitimate investment vehicles.