Macro Uncertainty Drags Down Crypto: A Data Perspective by IntoTheBlock

Macro Uncertainty Drags Down Crypto

This development has impacted the broader outlook for numerous investors globally, as concerns mount that its downfall could trigger a cascade effect on the Chinese economy, potentially reverberating across markets worldwide. Of particular concern is the U.S. market, given its status as China’s primary trade ally.

Investor sentiment has shifted towards a more bearish stance as reports of the situation proliferate in the media. A gradual sell-off commenced over the weekend, partly driven by lackluster price movements across various markets in the preceding week.

As Monday dawned, markets greeted investors with a sea of red, intensifying the ongoing sell-off. Notably, the crypto markets mirrored this trend, experiencing significant declines. Bitcoin, which had stabilized around the $47,000 mark over the weekend, swiftly tumbled to $42,300 at the market open. Selling pressure intensified with the commencement of trading in the U.S. market session, pushing Bitcoin further down to a low of $40,000 in spot markets throughout the day. This amounted to a notable correction of -15% since the beginning of the week.

Since that point, the market has staged a recovery, with Bitcoin rebounding to around the $43,000 mark, where it currently hovers:

Ethereum mirrored Bitcoin’s trajectory, sliding from the weekend’s $3,500 price level to a low of $2,800, marking a correction of -16% since the week’s outset. However, Ethereum has also seen a rebound, edging back up to the psychological resistance level of $3,000:

As is widely recognized among crypto investors, there exists a strong correlation between the price movements of Bitcoin and Ethereum. This correlation implies that the prices of these two assets tend to fluctuate in tandem, both in upward and downward movements. This tight correlation is evident in the following chart, where the correlation trend is much closer to 1 than to 0:

Indeed, seasoned investors often seek to minimize the correlation between assets within their portfolio. This strategy enhances diversification, as it helps to mitigate the impact of negative market movements. By holding assets with lower correlation to each other, the portfolio becomes less vulnerable to market sell-offs, thereby reducing overall risk exposure.

Cryptocurrencies not only exhibit strong correlations among themselves but also demonstrate significant correlations with certain traditional market assets. The recent price movements in the crypto market have been influenced by activity in traditional markets. Therefore, it is valuable to understand the historical correlations between crypto markets and traditional markets.

The following chart displays the correlation of BTC and ETH with major Western indices:

Indeed, the correlation coefficient ranges from -1 to 1. A correlation coefficient close to 1 indicates a strong positive correlation, suggesting a tendency for the prices of Bitcoin and the asset in question to move in the same direction. A correlation near 0 suggests no significant correlation, while a correlation close to -1 indicates a strong negative correlation, implying that the price of Bitcoin and the asset in question tend to move in opposite directions.

Both charts illustrate the high correlation between Ethereum and Bitcoin with major U.S. indices such as the S&P 500, Dow Jones, or Russell 2000. Additionally, for Bitcoin, there is a notable correlation with other major indices like the German DAX index. This implies that movements in these indices are likely to impact Bitcoin and Ethereum similarly.

The correlation with traditional finance markets has intensified as an increasing number of institutions opt to allocate funds to cryptocurrencies. During market downturns, these institutions must rebalance their portfolios, a task often delegated to algorithms, to uphold a consistent percentage of each asset relative to the entire portfolio. Moreover, another factor exacerbates the situation: cryptocurrencies are perceived in financial circles as riskier investment instruments compared to traditional financial products, largely due to their elevated volatility:

Amid a rapid market downturn, it’s crucial to acknowledge that investors tend to be more inclined to decrease exposure to riskier assets compared to assets with more stable performance. This behavior creates a feedback loop, leading cryptocurrencies to typically experience more pronounced discounts than less volatile products.

The recent events surrounding Evergrande serve as a valuable reminder of the importance of monitoring both the crypto ecosystem and global developments that affect traditional finance markets. Such events can have a significant impact on the entire crypto market, as evidenced by the recent market movements. Unlike sudden news-driven events, this situation unfolded gradually over weeks, emphasizing the need for proactive risk management techniques. Anticipating similar events and their potential impact on traditional financial markets can help investors implement effective risk management strategies to mitigate potential losses.

Despite the ongoing uncertainty in global markets, the macro outlook for cryptocurrencies remains positive. With inflation rates remaining relatively high, cryptocurrencies are increasingly becoming a staple in the portfolios of both individual investors and institutional players alike.

The three-month returns for both Bitcoin and Ethereum stand at 26% and 42%, respectively. These corrections could indeed represent compelling buying opportunities for investors who have been awaiting a more significant market downturn. It’s noteworthy that most major cryptocurrencies are currently trading at around a 30% discount from their all-time high prices.