The Turbulence in Bitcoin Has Spilled Over Into Traditional Financial Markets

  • On May 19th, certain government bonds rose in value, while futures on the S&P 500 stocks index fell and oil prices fell.
  • The price of bitcoin plummeted 30% on reports that China was planning a crackdown on digital currencies.
  • If retail investors decide to return to stocks, any significant and persistent drop in crypto might serve as a catalyst for a recovery in riskier sectors of the stock market.

The crypto-industry has been thriving for quite some time already, and the global covid pandemic helped it as well. The main reasons for that were that more and more people were investing their money in cryptos in the hope to generate financial profits during this tough economic time.

However, when it comes to the trustworthiness of the market, its volatility affects the investor’s attitude, and the volatility itself is dependent on many aspects.

This month’s massive collapse in cryptocurrency prices and subsequent rebound reverberated across traditional asset classes, perhaps providing a taste of what would happen in the case of a more significant shake-up. On May 19th, certain government bonds rose in value, while futures on the S&P 500 stocks index fell and oil prices fell as the price of bitcoin plummeted 30% on reports that China was planning a crackdown on digital currencies. The Japanese yen, a currency that is frequently in favor during times of stress also rose. After several hours, bitcoin strongly recovered. However, the turbulence drew the attention of major market players which was rare.

The impetus for these swings appears to have been a sharp crash in bitcoin, it was noted by the Rabobank rates analysts Richard McGuire and Lyn Graham-Taylor in their usual report the following day. Even a vulnerable publication like the Rabo Rates Daily has been obliged to acknowledge the importance of cryptocurrencies. It appears difficult to conceive of how there may be a direct relation between bitcoin’s manipulations and moves on the part of the global financial market.

Typically, esoteric variables such as tweets from Bitcoin lover Elon Musk, whose electric car business Tesla has purchased substantial numbers of the tokens, driving crypto values. Price changes in highly speculative cryptocurrencies seldom, if ever, have an impact on established and regulated markets. Cryptocurrencies sank dramatically again on Friday Afternoon as China’s vice premier Liu He reaffirmed Beijing’s intent to prohibit cryptocurrency mining and trade. The announcement caused bitcoin’s value to drop 12%, Ethereum’s value to drop 20%, and dogecoin’s value to drop 18%. The sell-off spread to the US stock market with the tech-heavy Nasdaq falling in the last hour of trade.

The price volatility is the main reason why people are skeptical towards crypto trading or investment, which can also be perceived as an advantage since those who bought bitcoins in September 2020 at approximately 10,000 USD, in March their funds were 5 times more, roughly to say more than 60,000 USD. However, due to the general negative attitudes towards the crypto-industry, a lot of brokerage companies are using marketing tips, such as giving the small amount of bitcoin no deposit bonus for signing up on the website or even for registering a friend. The same way was used by one of the major crypto platforms, Binance.com where the number of users was massively increased.

Soren Willmann, who is a credit analyst at Barclays, also highlighted that Bitcoin’s turbulence has rocked European corporate bonds. Direct ramifications are difficult to imagine, but to the degree that the crypto correction coincides with weakness in shares of modern technological businesses, it matters to European credit, since the markets find it difficult to ignore S&P 500 weakness.

Bitcoin lover Elon Musk, whose electric car business Tesla has purchased substantial numbers of the tokens, driving crypto values.

There is a lot of demand on the financial market for the crypto-industry, which directly increases the number of companies that were involved in providing the clients with the proper help. It is no surprise that as a result, the fraudulent activities increased and many people were involved in the scams. This is why the topic of bitcoin’s applicability to broader markets has become more serious among investors as authorities across the world aggressively circle the cryptocurrency circle, largely in an effort to strengthen consumer safeguards.

However, when it comes to the trustworthiness of the market, its volatility affects the investor’s attitude, and the volatility itself is dependent on many aspects. One of the main aspects, in this case, that should be taken into consideration is the impact of news and announcements. We have already seen how several world events have caused the price fluctuation, for example, the acceptance of bitcoin as a payment method by Tesla, which almost doubled the price of Bitcoin, but then, when Elon Musk announced that they would stop accepting it, the price was decreased by 50%.

The same case was when there were rumors about Microsoft starting accepting bitcoin payments, which also directly increased the demand as well as the price, however, when Bill Gates denied the rumors prices started declining as well.

One hypothesis is that if bitcoin prices plummet, it will be a significant hit to household budgets for retail investors, undermining the narrative that the booming consumer will keep stock markets afloat. Furthermore, certain funds and family offices have invested in cryptocurrencies causing a rise in interest among investment banks looking to meet demand. On the margins, a significant decrease in cryptocurrency might dampen the market’s desire for riskier investments.

On the other hand, a rise in crypto trading has corresponded with a reduction in volumes on the platforms that are used for stock trading popular with day traders who want to make a quick buck. If retail investors decide to return to stocks, any significant and persistent drop in crypto might serve as a catalyst for a recovery in riskier sectors of the stock market.

George Keburia

I'm a 24 year old financial consultant with 7 years of experience in this field.

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