The headline announced: “Dow sinks below 23,000; Nasdaq flirts with a bear market; Oil in free fall” (source).
The stock markets expressed disappointment and disdain following the announcement of yet another interest rate hike by the Federal Reserve in December last year. The DOW, for example, tumbled 2% due to the news — a figure that would hardly cause a stir in crypto markets, but quite an alarming quantity of money in the context of the much larger stock market.
On the same day as this fall in stock markets took place, Bitcoin enjoyed a more than 10% spike, with a hefty boost to the market capitalization of the larger crypto market, growing from its low of $100 billion less than a week before to the increased valuation of more than $130 billion; a 30% investment injection in less than a week and more than 10% growth on the same day as the most recent of a number of stock market crashes.
This sort of activity is referred to as non-correlation, or in exactly opposing situations such as this particular event, inverse correlation. In the case of inverse correlation, the two assets move in opposing directions — one ascends in value whilst the other descends. In the case of non-correlation, the two assets simply have no relationship in regards to their market movements, fluctuating independently from each other.
The concept of non-correlation is extremely important in hedging investments, as a savvy trader can protect against losses by investing in a range of assets that do not move in sync with each other. An investor who holds stocks and crypto (depending, of course, on the selected stocks and crypto) could be in a safer position on this occasion due to the balancing act performed by having assets moving in different directions.
Of course, this hasn’t always been the case when comparing the two greatly differing assets. For a number of months, Bitcoin lazily trailed the stock market, limping sideways with what can now safely be referred to as one of the more boring periods in Bitcoin’s short lifespan — that is, at least when strictly considering market movement and ignoring the fundamental development and remarkable innovation that has taken place over the last year.
On certain occasions, however, the two markets have moved in different directions, demonstrating Bitcoin’s ability to move apart from the stock market that, incidentally, looks to be heading, at some point, for its own massive bubble. Within the crypto market itself, assets continue to correlate much more strongly with Bitcoin, but even this has begun to diversify with some projects seeing more investment and many less worthy projects falling by the wayside.
It could be that Bitcoin and cryptocurrency might become a more attractive outlet, much like gold has been for centuries; an escape from falling investments, or simply a hedge to further balance an investment portfolio. In a time during which the stock markets could be subject to falling precipitously, cryptocurrency could serve as an excellent, albeit risky, alternative for investment.
To be fair, due to the market’s minuscule scale when compared to gold and stocks, we shouldn’t expect volatility to be calmed by any significant measure in the short term. The risks of investing in crypto are clearly greater, at least as of now, due to present conditions of scale. However, in the long term, it could be that Bitcoin, along with the diverging range of altcoins on the greater crypto market, might serve as an excellent offering of non-correlating alternatives for investors.