Bitcoin dances to the beat of Wall Street as more top traders enter the market

Bitcoin has mirrored the sharp swings in traditional markets this year, underscoring the tighter connection between cryptocurrencies and traditional financial assets as more professional traders enter the digital finance arena.

The world’s largest cryptocurrency is increasingly tracking asset movements that influence other global markets. Correlations to US tech stocks, crude oil and government bonds have all increased significantly over the past two years, according to Goldman Sachs research.

Bitcoin has often traded closely with Nasdaq 100 futures — derivatives that are seen as an indicator of sentiment toward U.S. tech giants — as markets wobbled in the first weeks of 2022. bitcoin’s price movements tend to be much sharper than those of many traditional financial assets, the links between the two asset classes are capturing the attention of analysts and investors.

“Before the pandemic, bitcoin and other digital assets exhibited low correlations with traditional financial market variables — in effect, crypto behaved like an entirely different ecosystem,” said Zach Pandl, co-head of strategy. exchange at Goldman Sachs.

“But over the past two years, as bitcoin has seen wider adoption, its correlation with macro assets has strengthened.”

Fundstrat, a boutique research house that produces reports on crypto and traditional markets, told clients earlier this week that “cryptoassets continue to exhibit a strong correlation to equities.”

The Nasdaq 100 index of the largest companies listed on Wall Street’s tech-focused Nasdaq Composite has fallen about 11% so far this year, while bitcoin is down 18%. Meanwhile, a basket of unprofitable tech stocks, which like bitcoin are considered speculative investments, fell 23%.

A growing number of hedge funds are now betting on cryptocurrencies, while Wall Street banks are offering services such as digital asset lending and custody to their clients, and high-frequency trading firms are becoming increasingly popular. more active in space. At the same time, big digital asset specialists like Galaxy Digital and Genesis Trading are playing a much bigger role in a market that was once dominated by retail traders.

The entry of big financial players into the market is one of the main reasons bitcoin is now acting more like a traditional risky asset, according to analysts and traders.

Bitcoin’s emerging behavior as an asset that investors buy when investors take a bullish view of the economy or sell when nervous is also supported by research from Nick Metzidakis, head of quantitative research at the specialist. Tyr Capital digital assets.

“Over the past five years Bitcoin has. . . been positively correlated to the Nasdaq, effectively behaving as a ‘risky’ asset,” Metzidakis said. “This relationship has been stronger since the start of 2020 and suggests. . . Bitcoin is considered a “risk on” or a “tech game”.

Metzidakis also found that the US jobs report, considered one of the most important economic data released each month, also affects the price of bitcoin, like many other actively traded assets.

But analysts note that bitcoin price movements are often triggered by factors specific to the cryptocurrency itself or the digital asset market more broadly.

Marcello Mari, managing director of Singularity Dao, a cryptocurrency trading company, said the speed at which new units of bitcoin were mined, the so-called hashrate, and the amount of dollars miners held in the reserves also had an impact on the exchange rate. .

The influence of large bitcoin holders, known as “whales,” is still strong, as ownership of the digital coin is still highly concentrated.

At the same time, regulation and potential changes to financial rules in major economies have also acted as powerful drivers of bitcoin’s price, noted Inigo Fraser-Jenkins, co-head of institutional solutions at AllianceBernstein. Bitcoin, for example, fell last May when Chinese regulators signaled a crackdown on the use of digital coins.

“At the moment, there is very little empirical evidence that bitcoin can act as an inflation or equity risk diversifier. In fact, the correlation between bitcoin and stocks jumped in the early stages of Covid,” said Fraser-Jenkins.