Crypto market has rebounded in the past week, but stock markets have been plunging.
In the past few days, the crypto market began recovering from a month-long bear rally. On the other hand, stock markets have largely plummeted around the globe or are moving at a sluggish pace.
The stock market has also shown signs of recovery, but it needs to catch up with the crypto market.
Correlation Between Markets
Earlier, both markets were in a bear run in tandem. Now, they have changed the directions, even though it was suggested that there is a correlation between the two markets.
The International Monetary Fund had observed that the correlation between returns of MSCI Emerging Markets Index and Bitcoin was 0.34 in 2020–21, a 17-fold increase from the preceding years.
Bloomberg had suggested that the 40-day correlation coefficient for Bitcoin and the tech-heavy Nasdaq 100 has reached almost 0.66.
According to the current scenario, the correlation is not holding true.
Stock markets are also recovering, but at such high correlations, the markets should not have diverging movements for this long.
Interest Rate Hike by Fed
Several days ago, it was announced that the Federal Reserve, central bank of United States, is going to raise interest rates.
Experts held the view that money would flow from crypto to safer investments such as bonds, fixed deposits, etc. which would plunge the crypto market.
But the present condition suggests otherwise.
Crypto markets are rising and stock markets are crashing.
The revised interest rates by Fed will come into effect in March. It should have triggered a sell-off in the crypto market, but the converse is happening.
The Russia Ukraine tension had been troubling stock markets around the world. It seems to be dissipating.
“De-escalating tensions between Russia and Ukraine are helping overall sentiment today, but that isn’t the only good news. US Covid cases are now down 80% from their January peak, another sign the reopening will be moving forward,” Ryan Detrick of LPL Financial told CNBC on Monday.
The geopolitical sentiment might have been pushing stock markets down.
Now that the situation appears to normalize, stock markets have also begun to rebound.
Whale Action and Institutional Investment
Crypto whales, individuals or entities holding large sums of cryptocurrency, are known to manipulate the market.
They may have bought extensive sums of crypto, thereby pushing the market up.
As per a report by digital asset management firm CoinShares, “Digital asset investment products saw inflows totalling US$75m last week. Ethereum finally broke its 9-week spell of outflows with inflows totalling US$21m last week.”
So, the interest of institutional investors in buying digital assets has resurged. This too may have played a part in the crypto market rebound.
Positive News from Russia About Crypto Regulations
On February 8, Russia announced its inclination towards regulating crypto. After a tussle between the legislators and the Central Bank of the Russian Federation (CBF), it was reported that Russia is going to prepare a draft law by February 18 that will recognise crypto as an “analogue of currencies” rather than digital financial assets.
This news might have created positive sentiment towards crypto as Russia is a major economy and also the third-largest contributor to Bitcoin mining.
Cryptocurrency market is just a little over a decade old, whereas stock market is over a century old. Drawing parallels between the two markets might not be possible as more data would be required. Maybe in a few years a strong correlation between the markets could be found.
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