Earlier this month, share markets grappled with macro and systematic trades amid concerns of a US recession, alongside a surprise decision by the Bank of Japan to lift interest rates which spurred an unwinding of yen carry trades.
The S&P/ASX 200 plunged 3.7 per cent on 5 August, while the S&P 500, Dow Jones, and Nasdaq tumbled in volatile trading with losses surpassing 2.5 per cent each.
Similarly, a bitcoin sell-off was triggered with the currency nose diving on 5 August to below US$50,000 for the first time since February.
But while stock markets have largely reversed their losses, bitcoin is yet to fully recover, raising questions about its ability to stand up to market volatility.
Ben Celermajer, director at Magnet Capital, assures that despite signs of a correlation between bitcoin and stock markets, the long term-picture debunks sceptics.
“I think that if I look back at the short-term history of markets, it seems like, at least in the last five years, during periods of drastic market activity, every asset class tends to move the same,” Celermajer told InvestorDaily.
“Granted, gold did hold up quite well in early August, when everything else was falling. I think that there was a bit of a liquidity crunch, and people were just trying to access wherever they could get liquidity to take a bit of risk off.”
Namely, Celermajer explains the bitcoin slump as being an anticipation of volatility in markets on 5 August.
“To its own detriment at times, over the weekend, crypto markets are fully liquid. So if people wanted to pre-empt a bad open on Monday and take a bit of risk off before that, really, the only place they could go to get that was crypto,” he said.
“I think that that’s what we saw. I think it was a bit of an overreaction to market panic.”
According to Celermajer, nothing changed for crypto over those volatile few days.
“There are still only ever going to be 21 million BTC, BTC’s inflation rate is still 0.9 per cent (and will be for the next ~4 years), trading never stopped, no central authority intervened, etc,” he wrote on his LinkedIn profile.
“But something did change – during the 21st century, rapid deterioration and panic in global markets has always been followed by one consistent action – rapid central bank intervention. This takes place via sharp interest rate cuts and quantitative easing (QE). This weekend [17/08-18/08] proved no different – expectations of central bank action changed drastically,” Celermajer added.
With this change in monetary policy expected shortly, Celermajer hinted now could be the time to invest in crypto.
“Recent market movements feel a lot like March 2020 – where global macro market panic flowed into crypto markets, dragging price down over 40 per cent in 24 hours. But history tells us this was one of the best times in the last seven years to buy crypto. Because fundamentally, nothing changed for the asset class, but the monetary policy easing cycle we entered significantly strengthened the value proposition for non-sovereign commodities and decentralised financial systems,” he said.
“Rate cuts and continued currency devaluation are seemingly an inevitability (this is a much longer conversation...) – what is most interesting will be the pace at which this takes place. Should central banks respond and bring forward / accelerate their easing cycle it could provide a short-term catalyst for crypto asset performance.”
Ultimately, Celermajer emphasised the importance of understanding the distinction between short-term volatility and a long-term correlation, noting that the two often diverge.
“In the short term, there’s a huge education gap, which means that markets react emotionally, especially when it comes to crypto,” he said.
“But over the longer term, I think as more and more people become aware, recognise the unique benefits that bitcoin possesses, that’s where you get this longer-term narrative of adoption, independent of what’s happening in the broader economy, or as the broader economy trends down this path of increased money supply.”
