Cryptocurrency meltdown: Can we see a rub-off effect in equities?

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Bitcoin on May 19 accelerated its week-long sell-off and slummed 30% touching a low of around $30,000 amid a series of tweets by Elon Musk about Bitcoin being not environment friendly. And China banning financial institutions from cryptocurrency business added fuel to the fire.

The rout on May 19 created panic among investors, leading to exchanges like Coinbase and WazirX witnessing temporary shutdowns. The selloff was huge for any asset class. But the moot question is whether this selloff can have a ripple effect or a rub off on stock markets? The answer is yes.

Crypto & stocks relation

Over the years the relation between bitcoin and the stock markets has grown with institutions being involved with cryptocurrency and the number of equities linked to digital currencies is on the rise.

Unfortunately, the sell-off in the Cryptocurrencies markets will lead to damage in the stock markets as well. The correlation has been strong in the recent past tweeted market expert Ajay Bagga.

Even running a simple correlation formula in excel between Bitcoin, S&P 500 and Nasdaq prices shows that they are highly correlated. Our analysis showed that the correlation between Bitcoin and S&P 500 was 0.85 while the correlation between Bitcoin & Nasdaq stood at 0.83.

Expert views

“We would have thought that cryptos would be a hedge against other asset classes, but they are nothing but momentum plays. So, what we have seen is that falling crypto has an impact on the global markets,” said Ajay Bagga.

The impact may be psychological, might be a wealth impact or maybe margin calls on crypto derivatives lead to people having to liquidate their stocks to meet those margin calls, added Bagga.

Generally, it implies if people are liquidating from a particular asset class, they would be investing into another asset class. That stands true even for Bitcoins. As JPMorgan pointed out that the institutional investors are ditching bitcoins for gold.