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BTC Tracks Nasdaq as Crypto Faces Its First Recession

·3 min read

Crypto market cap is down 57.7% from its Nov. 8 highs, and economists say we could be on the cusp of the first global recession since the 2008 financial crisis. That revives the undying question: is crypto tethered to the stock market?

Bitcoin has maintained above a 0.9 correlation with the Nasdaq since Apr. 8, according to a dashboard by The Block. A correlation of 1 would mean that crypto and the Nasdaq are entirely in lockstep. Simply put, this means that crypto has been tracking the stock market more than 90% of the time.

A graph charting both the Nasdaq and BTC from the beginning of the year suggests the correlation has been strong throughout the year.

Bitcoin (blue) vs Nasdaq (orange)
Bitcoin (blue) vs Nasdaq (orange)

Crypto’s correlation with the stock market is why Richard Craib, founder of Numerai, a hedge fund that uses crypto to crowdsource economic models, on May 8 announced he was selling all the ETH he bought eight years ago in the cryptocurrency’s ICO for $0.26 per token.

Craib said in a Twitter thread that he sold his ETH because crypto was correlated with both venture capital flows and the Nasdaq. Other investors, while not explicitly selling ETH or other crypto assets, are thinking along similar lines.

The Liquidity Trade

“For [the] recent period, it [has] been all one trade — amount of liquidity,” Jordi Alexander, the CIO of Selini Capital, best known for his article that framed OlympusDAO as a Ponzi, told The Defiant.

The investor said that in 2020, well before interest rates started rising, crypto (and equities) were essentially rising because there was lots of money flowing around in the market.

“People don’t understand inflation at all, I’ve found,” said Alexander. “There’s the money printing phase, where peoples’ bank accounts are going up. Bitcoin does well but so do other assets.” To Alexander, that phase took place in 2020.

In 2021, people realized that other people’s bank accounts are going up, too, and there’s only so much of what Alexander called “real stuff” to buy.

That’s when “All the excess money goes into speculat[ive] games of greater fools,” the investor said.

“Bitcoin doesn’t do great because there are wild returns on random things happening.” Confusing winners, like the ascension of Bored Apes, could be examples.

Now in 2022, with two Fed rate hikes under our belt and more on the way, money doesn’t slosh around like it used to. As a consequence, traders aren’t buying dips, said Alexander, explaining why the price of Bitcoin has fallen 29.6% without remorse since the Fed’s first rate hike on Mar. 16.

Alexander predicted the crash in December. On the crypto podcast UpOnly, he said that crypto would crash sometime around March or April, once rates went up and money printing slowed down.

“The liquidity just won’t actually be there, people will realize it’s not there,” Alexander said in December of the then-hypothetical (and now very real) crash.

The investor predicted that BTC’s correlation with equities will fall in the second half of the year, when stocks meander sideways and inflation persists.“BTC is basically designed exactly for this stagflationary environment,” the investor said.

Indeed, BTC with its cap of 21M tokens, is all but guaranteed to become more scarce relative to fiat currencies. “The demand for a hard money asset only exists when growth is low, liquidity is capped, and purchasing power is a struggle to maintain,” Alexander said. According to him, that time has yet to come.

While “it’s all one trade” might hold true for now,  Bitcoin may soon shine brightly once again.

At the very least, that’s some hopium for embattled crypto hodlers.

Read the original post on The Defiant