Talking Points:
- Cryptocurrency Correlation to Stocks Has Risen Since Covid
- Macroeconomics Matters for Cryptos
- Crypto-Exposed Stocks – Microstrategy, Bitfarms, Marathon Digital, Riot Blockchain
Cryptocurrency Correlation to Stocks Has Risen Since Covid
Since the Covid crisis first hit financial markets in Q1 2020, Bitcoin has become increasingly dictated by macroeconomics, which has been exacerbated by the increase in institutional involvement within the space. As the chart below (Figure 1.) shows, the correlation between the Nasdaq 100 and Bitcoin has been steadily rising in recent years. In other words, Cryptocurrencies trade more like a risk asset and thus when equities rise, cryptos will also have a tendency to move in tandem and vice versa when equity markets sell off.
Figure 1. Bitcoin/Nasdaq 100 Correlation
Source: Refinitiv Datastream, DailyFX
Macroeconomics Matters for Cryptos
Just as MMT (Modern Monetary Theory) policies utilised in 2020 had been a key factor in sending cryptocurrencies to the moon. The subsequent inflation shock, which has since seen central banks respond by aggressively withdrawing stimulus has been equally influential in sending cryptos crashing back down to earth. Long gone the view that cryptos are an inflation hedge, in comes the acceptance that Bitcoin is essentially a high beta proxy for the Nasdaq 100. It is no coincidence that cryptocurrencies near enough peaked the moment that Fed Chair Jay Powell removed the description that inflation was transitory. Again, this further emphasises the point that when trading cryptocurrencies, more so the heavyweights such as Bitcoin and Ethereum, macroeconomics matters. Therefore, it is important to understand risk sentiment in the equity space. In layman’s terms, markets are risk-on when stocks are rising and risk-off when stocks are falling.
Figure 2. Bitcoin Chart: Daily Time Frame
Source: Refinitiv
Crypto-Exposed Stocks
As with most financial assets, traders can trade an asset either directly or indirectly via a derivative. For example, if I was bullish on oil, I could opt to go long energy stocks, or if I was bearish on the S&P 500, I may look to sell AUD/JPY. This can also apply when trading Bitcoin specifically, not shiny objects such as alt-coins.
The table below shows a list of crypto-exposed stocks, where exposure to crypto stems through either being a Crypto miner or a Crypto holder via treasury holdings.
Figure 3. Most Exposed Stocks to Bitcoin
That said, and as is shown in Figure 4., when trading crypto-exposed stocks it is important to be aware of the negative feedback loop that can arise. Just as these stocks can outperform the underlying asset, they can also notably underperform.
Using Microstrategy as an example, in times of market distress, not only do you have the stock selling off amid risk-off sentiment, but due to its exposure to cryptocurrencies, this then leads to an exacerbation of the sell-off in the stock. Looking back at the three largest one-day percentage declines in Bitcoin this year at 22.7% (June 13th), 16.5% (May 9th) and 10.4% (January 21st). Microstrategy fell by 25.2%, 25.4% and 17.8% respectively and thus underperforming Bitcoin by 6.2%. But, this can be expected due to its beta to Bitcoin being over 1.
Figure 4. Max Drawdown
Key Takeaways
- It is important to understand where we are in the economic cycle. Cryptocurrencies are risky assets and therefore need stock markets to be rising and central banks to be loosening monetary policy. Macroeconomic matters!!
- Crypto-exposed stocks can outperform Bitcoin when the good times roll. However, times of market distress can lead to a negative feedback loop.
- Microstrategy is the most noteworthy Crypto-exposed stock.
