There seems to be no end to this free-falling trajectory of cryptos in recent times. More than $500 billion worth of value evaporated from the markets over the last week. And slipping to $1.2 trillion, even the global crypto market capitalisation took a very serious beating. All major cryptos like Bitcoin, Ethereum, Solana and more continue to paint the market in double-digit losses.
Recent data from the Bloomberg Galaxy Crypto Index (BGCI) suggests that over the past month, cryptocurrencies have delivered negative returns of about 33.9%. In fact, return generation in this space has only gone southwards since 2020.
Back then, you would’ve made a whopping 305.1% return on your investments. Cut to 2021, the returns reasoned out 59.8%. In 2022, this figure is a disheartening 41.5%. And if analysts are to be believed, it’s not over yet.
What’s the Mood?
It’s safe to say that over the last week, bloodshed, historic falls and carnage is all that global markets have witnessed. And that doesn’t exactly inspire investor confidence and optimism. No wonder then, the crypto fear and greed index, which is a barometer of investor sentiment about cryptos, seems to have stooped to as low as 12. This indicates extreme fear.
To put this in perspective, this index ranges from 0 to 100, where 0 indicates extreme fear and 100 means extreme greed. That means that the market is currently panicking over the market slump and is just looking to sell. Once the bearish cycle wears off, the market will pick its momentum again.
On the other hand, if the market is inching closer to the 100-mark, that just indicates an over-valued market being driven by greedy investors. Such a market never presents a good buying opportunity for investors. And more often than not, it’s awaiting a correction, where the markets will return to average.
But what should an investor do in such a situation? Shivansh Bhasin, founder and CEO of The Investrology, has some advice. “We can’t control market uncertainties, but we can control how we deal with things. We must perceive our challenges and should try to convert them as opportunities to make profits,” he says.
That’s what the Oracle of Omaha and legendary investor Warren Bufffet also follows. In fact, one of his cardinal investing rules is to “be fearful when others are greedy, and be greedy when others are fearful”. In other words, buy the dip!
Take some inspiration from Cathie Wood’s ARK Investment Management that’s walking this talk with her Coinbase move. The popular crypto exchange had a bleak first quarter, with its revenues and number of active users falling sharply.
But after its shares plummeted 48% to trade at $58 over the last week, Wood bought around 5,46,579 shares of its shares. Now, they form 7% of her fund’s total assets.
And in all reality, there’s nothing fundamentally wrong going on with crypto. Most analysts think everything is in place. But remember how you got in trouble for your sibling’s mischief? That’s what’s happening with crypto right now.
“Correlation between asset classes is not ideal. Yet, this tells us the fall is not signalling a fundamental weakness in any asset but simply the broader economic sentiment and the nature of capital flow. We’re also likely coming off of a multi-year bull run across asset classes,” details Mr Ashish Singhal, co-founder & CEO, CoinSwitch.
But What’s Going On Between Stock and Crypto Markets?
It would’ve been hard to miss the ongoing stock market massacre that accompanied this crypto carnage. All major global indices are down in the dumps, with tech stocks like Apple witnessing selloffs like never before. Currently, the NASDAQ index has yield-to-date (YTD) of -27.32% and has delivered -14.83% over the last month. Even the S&P 500 Index is slumping, down by almost 4% over the last week.
Wonder if there’s a correlation? Yes. And they are rapidly rising.
Notes Aritra Sarkhel, director of public policy at WazirX: “If we observe the current trends, it is visible that the movement in crypto markets mirrors the other financial markets globally. For example, the recent Fed announcement of increasing rates was followed by a market dip.”
Over the years, the movements of crypto markets have increasingly begun to mirror that of the stock markets, and particularly the tech-heavy NASDAQ Index. The correlation coefficient between BTC and NASDAQ is a solid 0.82. Crypto even correlates with the S&P 500 Index with a coefficient of 0.59.
Since 1 represents perfect correlation and 0 represents a negative association, it won’t be an overstatement to say that with these coefficients, the crypto market largely clones the stock market’s movement.
But underneath this mathematical relation, there’s actually a more humane reason to this reflection.
“Human emotions and mindset are one of the core reasons for this unprecedented interconnectedness between virtual assets and financial markets. For example, if we are seeing a global panic scenario due to war, inflation, rising interest rates, etc. our mind tends to get fearful while trading in any asset class. And that’s what makes the correlation between the two markets,” explains Bhasin.