Experts in the financial market and in the cryptocurrency industry expect a significant correction in the stock market in the short term. Given the high observed correlation of Bitcoin (BTC) with stocks over the past three months, there is a strong likelihood that Bitcoin will follow this example.
The US stock market has experienced extreme volatility after the Dow Jones Industrial Average fell about 7% on June 11thled by double-digit declines in airline stocks. A confluence of three factors appears to trigger significant volatility in the equity markets: the uncertainty surrounding the COVIlD-19 pandemic and the shift of institutions to cash and bonds over stocks and major geopolitical risks.
Bitcoin has shown a correlation with the US stock market since March. Source: Skew
Yoni Assia, the CEO of eToro – a large multi-asset broker that makes trading cryptocurrencies easier – warned that a stock market crash could soon follow: “There will be a decline very soon (on the stock exchange), in the next 3 weeks someone is not sure who will sell / reduce his position and cause the markets to crash. Buyers need to be careful. Reservation Emptor“”
The main reason why Assia predicts a decline in stocks is that, since March, private investors have mainly fueled the recovery in the stock markets. He emphasized that private investors behind a rally tend to make a strong correction. The trend is similar to when the price of Bitcoin reached $ 14,000 in June 2019 and fell to $ 7,500 just three months later, a decrease of 46%.
Assia said although central banks are printing more money, “We will see a correction as this recovery appears to be fueled by retail speculation. “Historically, this recovery ends with a correction.Mati Greenspan, co-founder of Quantum Economics, told Cointelegraph:
“I agree with your rating [de Assia] the rise in stocks driven by retail and therefore likely to come to a bitter end. I have been in short positions on the stock exchange since Monday. The funny thing is that the correlation between stocks and Bitcoin has only recently intensified, suggesting that Bitcoin is being driven by institutions. “
If stocks continue to fall below key levels, Bitcoin’s price could also see a downward trend due to its reaction to the sharp decline in the US stock market. After the stock market fell 7% on Thursday, BIcoin’s price fell 9%This suggests that the weakness of stocks can affect sentiment regarding other risky assets like cryptocurrencies.
Decreased appetite for high-risk assets
Winifred Cisar Stieglitz, Chief Strategy Officer of Wells Fargo, said in Bloomberg Real Yield that investors have enough cash. But instead of stocks, he said, Investors prefer investment grade or low risk bonds. Institutional and high-equity investors see too many risks in the global equity market to build large equity positions.
Aside from existing investors in the crypto market and retailers, demand for Bitcoin has come from two sources in the past few months: institutions through the Grayscale Bitcoin Trust and Chinese investors through the Stablecoin Tether (USDT), which is supported by the dollar. Research firm Diar reported in June 2019 that 62% of the tether chain’s activities came from Chinese investors.
In the short term, Bitcoin needs to see constant demand from institutions and investors in China for the BTC price to remain above the key support level of $ 9,100 and point to previous highs of $ 14,000 and $ 20,000. If the flow of capital in Bitcoin decreases and traders in the cryptocurrency market increasingly try to hedge their assets through Tether, the likelihood that BTC will follow the stock market trend could increase.
Because of the uncertainty surrounding stocks, billionaires are leaving risky assets
Barons and billionaires on Wall Street, including Mark Cuban, Paul Tudor Jones and Warren Buffett, have stressed that in the short term they prefer to strengthen their hedging positions and cash reserves rather than going public. . On May 14, the Cuban at the CNBC closing bell said: “I think it is almost impossible to predict where consumer and business demand will come from. For this reason, it is difficult to create a company valuation. “
However, high-profile investors do not necessarily predict a strong downward trend in the US stock market. Based on the data, the coronavirus pandemic has made it difficult for companies to evaluate large corporations.
The Fear and Greed index in all markets is moving towards fear. Source: Arcane Research
The International Monetary Fund raised a similar problem when it warned that the pandemic could distort economic data and make valuation by central banks and investors more difficult. In a blog post, the IMF said: “Accurate and timely economic data are critical to making political decisions, especially during a crisis. However, the COVID-19 pandemic has disrupted the production of many important statistics“”
At a time when policymakers and big banks are having trouble processing economic data properly, it is almost impossible for private and institutional investors to fully understand the market dynamics. For this reason, wealthy investors have avoided the stock market. If you also view Bitcoin as a risky asset, this could increase the likelihood that institutional influx in cryptocurrencies will decrease.
The action by the Federal Reserve and other major central banks, including the European Central Bank, Aggressive stimulus to their respective economies continues to point to the weakness of the global economy, which may affect demand for high-risk assets.
EU Commissioner Paolo Gentilon said he does not expect countries to veto a large economic deal, which suggests that countries recognize the serious downward trend in the global economy. According to reports, the government of the President of the United States, Donald Trump, has planned a second round of stimulus measuresin the expectation that the economic consequences of the pandemic will weigh heavily on the equity and labor markets.
Bitcoin’s weak technical structure
Bitcoin is at a point where a further downward trend would indicate that a strong correction is inevitable in the coming months. Crypto trader Satoshi Flipper said: “Critical moment here for BTC bulls … losing that level and the next 6 months will be painful. Or we turn to 10.4 km and ATH by the end of the year. “
Leading cryptocurrency traders fear that Bitcoin will face a deep retreat due to the historical importance of the $ 10,500 price level. Every time BTC was close to outperforming it since the third quarter of 2019, it was declined below $ 7,000.
Arcane Research noted in its weekly update for customers that the cryptocurrency market tends to coincide with the stock market. The researchers found that Bitcoin’s price had difficulty detecting volatility until the stocks moved. Therefore, Bitcoin’s weak technical structure, combined with a tendency for a sharp decline in the withdrawal of stocks, increases the likelihood of a longer short-term correction:
“A week of sideways price movements turned into a decline yesterday as global markets pulled the cryptocurrency market down. […] Although the correlation between stocks and cryptocurrencies has been declining recently, we can’t deny yesterday’s clear similarities. “
The research company also emphasized that “The uncertainty has returned to all markets“With the Fear and Greed index returning to the fear zone after the June 11 stock market slump, all assets and value stocks, including stocks, gold and cryptocurrencies, may have fallen due to the sale of institutional investors that have hit the record demand from retail platforms such as Robinhood and Charles Schwab used.