After a fairly nice bull run, the Dow Jones Industrial Average has had a rough couple of weeks. The cryptocurrency is also experiencing a correction. Could there be a connection between the two investment worlds?
We must be careful about using vague terms like "bull and bear markets" when moving into any investment area. The main reason for this is that the cryptocurrency posted gains of well over 10x during its amazing “bull run” in 2017 . If you had invested $1,000 in Bitcoin in early 2017 , you would have made well over $10,000 by the end of the year. Traditional equity investments have never experienced anything like this. In 2017, the Dow was up about 23%.
I am very careful when reviewing data and charts because I realize you can let the numbers say what you want them to say. Just as crypto saw huge Kryptowährungen Kurse gains in 2017, 2018 saw an equally rapid correction. The point I'm trying to make is that we must try to be objective in our comparisons.
Many new to the cryptocurrency camp are shocked by the recent crash. All they heard was all these early adopters getting rich and buying Lambos . For more experienced traders, this market correction has been fairly obvious given the skyrocketing prices over the past two months. Many digital currencies have recently turned many people into millionaires overnight. It was obvious that sooner or later they wanted to take some of that profit off the table.
Another factor I think we really need to consider is the recent addition of bitcoin futures trading. Personally, I believe there are major forces at work here, led by the old guard who want to see crypto fail. I also see futures trading and the buzz around crypto ETFs as positive steps towards mainstreaming crypto and considering it a “real” investment.
After saying all that, I started to think, "What if there IS a connection here somehow?"
What if bad news on Wall Street affected crypto exchanges like Coinbase and Binance ? Could it cause them both to fall on the same day? Or what if the opposite were true and it led to an increase in crypto as people look for another place to park their money?
In order not to try to skew the numbers and to be as objective as possible, I wanted to wait until we saw a relatively neutral pitch. This week is as good as any as it marks a period when both markets experienced corrections.
Unfamiliar with cryptocurrencies , unlike the stock exchange, exchanges never close. I've traded stocks for over 20 years and I know that feeling all too well when you're sitting around on a lazy Sunday afternoon thinking,
"I really wish I could trade a position or two now because I know the price will change significantly when the markets open."
That Walmart -like availability can also lead to knee-jerk emotional responses that can snowball both ways. With the traditional stock market, people have the opportunity to hit the pause button and sleep on their decisions overnight.
To get the equivalent of a one-week cycle, I took the crypto trade data for the last 7 days and the last 5 for the DJIA.
Here is a direct comparison of last week (3-3-18 to 3-10-18). The Dow (as 20 of the 30 companies that make it up are losing money) fell 1330 points, down 5.21%.
In cryptocurrencies, finding an apples-to-apples comparison is a little different, as a Dow technically doesn't exist . However, this is changing as many groups create their own version of it. The closest comparison currently is using the top 30 cryptocurrencies in terms of total market cap.
According to coinmarketcap.com, 20 of the top 30 coins have been in the red in the last 7 days. Sound familiar? If you look at the entire crypto market, the size has dropped from $445 billion to $422 billion. Bitcoin , which is considered the equivalent of the gold standard, saw a 6.7% decline over the same period. Typically, like bitcoin , it 's about the altcoins .
Coincidence or causality? How come we saw almost similar results? Were similar reasons involved?
While the price drop seems similar, I find it interesting that the reasons for this are very different. I already told you numbers can be deceiving, so we really need to pull back the layers.
Here's the top news impacting the Dow:
According to USA Today, "Strong payroll data fueled fears of imminent wage inflation, adding to fears that the Federal Reserve may have to hike rates more frequently this year than three times what it originally announced."
Because crypto is decentralized, it cannot be manipulated by interest rates. That could mean that, over the long term, higher interest rates could lead investors to move their money elsewhere for higher returns. This is where crypto could very well come into play.
If it wasn't interest rates, then what caused the crypto correction?
This is mainly due to conflicting news from multiple countries on how their stance will affect the market. People around the world are uneasy about whether or not countries even allow them as a legal investment.