As an alternative store of value, cryptocurrencies are considered as viable long-term investments, especially by millennials, in a period of global financial market instability and volatility. However, recent weeks have shown that cryptocurrencies are still vulnerable to the weakening global economy and the asset class is not able to perform as a hedge against uncertainties in the market.
Global Markets Crash
A lack of correlation is not equivalent to an inverse correlation. Merely because an asset is not affected by a certain catalyst, which in the case of crypto could be the instability of the global market, it does not mean that the asset increases in value as a result.
Historically, the crypto market has demonstrated a lack of correlation with the global stock market and traditional markets like equities. It has consistently recorded independent price movements regardless of how the financial market performs.
Over the past several weeks, as investors began to head towards the exit of stock markets fearing a further drop in U.S. stocks, the price of major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) plunged by more than 35 percent.
The U.S. stock market is experiencing one of its worst sell-offs in history and the trade war between the U.S. and China has led to a decline in the valuation of the Chinese stock market. Overnight, Shenzhen Composite fell 3.3 percent and Shanghai Composite dropped 2.5 percent.
The weakening U.S. and Chinese markets directly affected the economy of South Korea, which was already in decline due to the country’s struggling growth rate. The Kospi fell by 1.2 percent in the past two days and investors generally expect the instability of U.S. and Chinese markets to be sustained.
Alvin Cheung, associate director for Prudential Brokerage, told SCMP:
“There is a lot of negative news about the US criticising China before Trump and Xi meet next week, and that has dented sentiment. The mixed messages could be the US trying to win some bargaining chips for the upcoming meeting. Investors are on the sidelines, closely watching to see if the meeting will yield any concrete results.”
The trend of the global market is gearing towards the elimination of high-risk stocks, equities, bonds, and assets, which includes crypto. The short-term price drop of the market was triggered by the in-fighting of Bitcoin Cash and Bitcoin Cash SV, but the crippling global economy is said to be one of the major catalysts of the declining momentum of cryptocurrencies.
When Will Crypto Demonstrate Inverse Correlation?
Crypto could become a store of value, like gold, that is used by investors to hedge against the global economy. However, due to a lack of liquidity and infrastructure for retail traders, cryptocurrencies are not capable of operating as a hedging tool for large-scale investors.
As the market develops and the industry grows, better liquidity products will become available for both institutional and retail investors. Only then, crypto could potentially work as an inversely correlated asset to the global financial market.
Featured image from Shutterstock.
Author: Joseph Young