Why Bitcoin Trades Like A Stock

might say that those prices are positively correlated. But if you're an investor looking to diversify your portfolio, you don't want everything going in one particular direction, And for a while it looked like crypto assets might fit the bill. Over the past year, as inflation rates have begun to rise, not just in the US but around the world, the price of crypto has fallen in line with the price of stocks. What does that mean for crypto supposed independence

from other markets? Bloomberg reports of Aldana Hadrick joins me for more. Holdanna, thank you so much for joining us today. Thank you for having me. You are one of the folks at Boomberg who writes about pretty much everything in markets. I feel, yeah, just about. It's just about and in that extremely broad and interesting remit that you have. One of the places you've been reporting on has been what's happening with crypto as it relates to what's happening with stocks.

Can you talk a little bit more about that. Yeah, I love looking at this because I love looking at the stock market, which I cover on a daily basis, and then also crypto, which is just its own little animal. But basically, what's been happening this year, broadly speaking this year is that we have really strong correlations between stocks,

US stocks and cryptocurrencies. And when I am saying cryptocurrencies, I really mean bitcoin, because a lot of people are just looking at bitcoin basically, And so what you're seeing is that on a day when stocks are up, you're very likely to also see bitcoin going higher. When stocks are down, bitcoin also very very likely is going down.

So we have this really strong correlation. The correlation is particularly strong between bitcoin and tech stocks, and that's because a lot of strategists and analysts, when they're looking at these different asset classes, what they'll say is that both are sort of risk here. So give a lot of tech companies that are high growth companies. High growth and high growths means aren't necessarily super profitable fast exactly, they're expanding,

you know, they're spending a lot of money. The cash burn is really high, but profits maybe are out in the future. Everybody knows that crypto is really really volatile, and so therefore you you sort of just have both

falling into the same category. And so these correlations have been really really strong in two because we've had this you know, different Federal Reserve than what we've had over the last two years, where you have the Federal Reserve and you know, central banks around the world raising interest rates to combat persistently hotter than expected inflation. You're seeing these hotter than expected inflation prints. And so that's just not an environment that is very it's not comfortable for

for crypto and for tech stocks. Well, let's talk about why that is right. So when folks say, oh, high interest rates are bad for text dogs or high interest rates are bad for stocks, like, what exactly is that like directionality there? Why is the one leading to the other. Well, if you have higher interest rates, it's just you know, the cost of doing business becomes a lot higher. That's

exactly what the FED actually wants. They want to cool down growth because we just have been having inflation coming out hotter and hotter than expected for just a much longer period of time than so many people had been expecting.

And so when you have this environment where it just costs more to be doing business basically anything, yes, basically anything for tech socks, it's you can sort of just look at it and think about, Okay, we have these high growth names like we just mentioned where out in the future, their their profits are just much further out in the future, and so in a higher inflation environment,

those companies just don't fare as well. And then, just as we mentioned, you have this correlation with because it is risk here, just people think of it as being risk here, and so it's just it's think about an everyday investor, do they want to be owning something that's super risky that can sort of swing around based on macro trends and what then or our Nilon Musk tweet, the flow of money is just not what we saw over the last two years, where the FED was being

much more accommodative in terms of, you know, trying to stabilize the economy during the pandemic, where they were buying treasuries and just putting a lot more money out into the system. Now they put a stop to that. They're raising interest rates. The labor market is extremely tight and inflation is much too high against this backdrop, today, the Federal Open Market Committee raised its policy interest rate by three quarters of a percentage point and anticipates that ongoing

increases in that rate will be appropriate. Here's the thing, though, This correlation persisted or existed before a higher inflationary in a higher interest rates environment, and that was despite the assertions of various folks in crypto, especially bitcoin, as you mentioned, who would always say, no, no, the whole point of bitcoin is to not be like anything else that's happening

in the market. Why do you think even prior to this environment that you're describing, where like all risk assets moving in one direction, why was that not holding true? Why was bitcoin not behaving in the way that people were expecting. I love these arguments, I love hearing them. There's so many, and they tend to sort of change,

like the flavor changes, depending on what's happening. So maybe you know, like three or four years ago, you were hearing a lot of people saying that you should own cryptocurrencies because you know, for bitcoin, the supply is limited. So the idea is because the supply is limited, that it will act as a very good inflation hedge. Three or four years ago, we had inflation in the US running it around two percent. Right now, obviously that's very,

very different. So really what should have happened had that hand out is that bitcoin would be performing a lot better during a higher inflation environment. These are just theories, you know, their arguments for for ornaments, the arguments. Yes, I mean, you have a lot of scholars who just

look at this sort of on a longer trend. I know, I've I've talked to some professors and scholars who have looked at gold, for instance, where you just have a much longer history to study, and they had been warning all along, like, you know, maybe this really isn't the case, maybe bitcoin is not digital gold exactly, and you know, wait to see how things pan out, especially wait to

see what happens during crashes. And so now we really do have it not holding up as well, and at the same time we have really high inflation, forty year high inflation in the u S at least, and there are other countries where like that's cute. Yeah, we love that. Thank you, Danna. We'll be right back. What about the idea that the institutionalization of crypto, which means like more traditional, bigger investors moving in, contributes to that correlation with stocks.

How does that work in practice? This is a huge component of this. This is a really big factor, I think because over the last two years, I would say largely is where you had a lot of institutional investor just coming in becoming more interested in crypto. You know, maybe in two thousand eighteen, two nineteen, they were writing it off, they were saying, it's way too volatile. I don't want to be involved with this. Then you saw crypto taking off during the pandemic again because we had

really loose accommodative monetary policy from low low interest rates. Yes, and they didn't want to miss out on what had been happening in one where crypto prices were just skyrocketing. It was the hot thing, it was really trendy. Everybody wanted to be in on it, whether retail or institutional investors. So having institutional investors be a big player in the space definitely contributes to this idea that the correlations with stocks and crypto are just much tighter or stronger in

recent months than they had been. And it's the reason for that that institutional investors just like buy and sell way more and so they have that ability to move markets in one direction or another. Yeah, And it's really art actually to break down. Like I think people are obsessed with figuring out like what proportion of if you're looking at bitcoin for instance, like is it retail, what

proportion is institutions? Uh, people love looking in at this and into this and having having huge arguments about it. You know, retail investors definitely got hurt during this sell off. So we had bitcoin hitting nearly sixty nine thou at the end of November, it's fallen something like forty Yeah, exactly.

So definitely there's a lot of people who have lost a lot of money because they bought the high the high and now or if they're selling, they're selling a pretty decent blue One really interesting thing that to be looking at to figure out sort of like who is getting impacted is you can look at a number of different measures like this one is wonky, but like in the money measures where you're looking at the percentage of bitcoin addresses that are in the money, meaning you know,

people who bought bitcoin of prices lower than current prices, and that has really been trending lower during the decline, meaning that people are just you know, sometimes maybe they they've just had enough and they sell their bitcoin or their crypto holdings, even at a loss, even at a loss. And so the reason you're able to do that is because of course all these transactions aren't public, or at least they are accessible if you know what you're looking for. Yeah,

I mean that's what the whole blockchain is. You're supposed to be looking at this sort of public ledger. It's supposed to be very transparent and open where you can see how money is moving around. You talk to investors all daylong. Yes, by the way, what is the vibe um? So I talked to investors who you know, like stock

market investors as well as crypto people. It's really within crypto. Again, going back to those arguments that you might be hearing, like it's an inflation hedge, things will pick up, things will be better. You a lot of times you'll hear some of those arguments where you know, maybe they're basing things a little bit more on sentiment than what's actually

going on on the stock market side. Just about everybody I talked to when they're talking about crypto there, they always are tying things back to correlations and how bitcoin on its own isn't really independent, so to say, doesn't become a self fulfilling prophecy though, where you like, if you believe a thing is correlated, then you're like, well it's going to move in this direction. I might as well. I might as well, Yeah, I might as well a little bit. Yeah, that's a good point. The hive mind

of markets. One of the stories that you wrote recently, because you know, you went one key, let's stay there. But one of the stories you were recently was this idea of like one of the most profitable trades in crypto was like buying and selling at a time when the stock market was actually not open because bitcoin trades seven. How did that work as a trade? This is so fun, This is super interesting. So we know crypto trades seven. It's trading every single day of the week, even on holidays.

We have a trading internationally across hundreds of exchanges. The stock market is open Monday through Friday to four pm New York time. And so if you separate out those hours that time span and look at how bitcoin tends to perform during those hours versus the so called after hours when US markets are closed, you actually see that bitcoin doesn't fare as well when US markets are open, and then it holds steady. It's sometimes it does really

well in these so called after hours. So this is the after hour effect is basically what it's been dubbed, where on weekends maybe you can see it rallying and having happy times, and then as soon as as soon as the US as soon as they wake up, it's like so, yeah, so this is really really interesting. There's a couple of different theories on what's going on. One, for instance, is that news continues to come in overnight, so traders have to keep pricing all of that stuff in.

Another is if you, as stocks are closed and you're trader and you're still very interested in seeing what's going on, you're forced effect. Yeah, I mean you just yes, the board the board markets trader h yes, yes, uh, and uh we're very trendy, very trendy, uh, where they're forced to look at crypto because stocks are closed. Another is that maybe you just have a lot of international investors

who are more willing to take on greater risks. You know a lot of international exchanges might let you use a lot more leverage, for instance, more you can just be a bit risk here with your with your bets. The fourth one, which I've heard from a couple of people now, is we just don't know. These are just theories. Nobody knows. I like to say it's aliens. So we again all all of the sual things that we resort to, and we have no idea why something is happening. Yeah, exactly.

But again it just goes to show this correlation and just how bitcoin is moving during US hours, when US stock investors are up and about and during their thing. All right ya, you heard it here first, the board trader hypothesis of correlation. We were the first, We were the very first. Don't google it, just don't use anyone else's, don't ask anybody about it. Amazing. Thank you, such a pleasure,

as always, thanks for having me. You can find more of Wildanna's reporting on the Bloomberg Terminal on Bloomberg dot com or find her on Twitter. She's at Vildanna Hadrick. That's h A j R. I C. On the next episode of Bloomberg Crypto, we'll take a look at where the UK stands when it comes to protecting crypto investors

from fraud, scams and abuse. Bloomberg reports A will show who's based in London will join me for a conversation about where the UK is and where are you think it should be when it comes to keeping consumers safe from crypto risks. I'm Stacy Marie Ishmael and this is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts.

Email your questions, comments, so suggestions for the show to Crypto at Bloomberg dot net and you'll find us on Twitter at Crypto. The supervising producer of this episode is Vicky very Galina. Associate producer is zan Ab Sudiki. Associate producer is Thy Butler. Desta wonder At is our engineer. Original music by Leo Sidron. Bloomberg's head of Podcasts is Francesca Levi.