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I’m posting Chart #1 because it’s so intriguing. Bitcoin (BTC-USD) is the orange line, stocks the white line. I’m not sure why it is that in the past 2-3 months Bitcoin and stock Prices appear to be dancing in lockstep, when six months ago it looked like Bitcoin was leading stocks.
Since its all-time high last November, Bitcoin has plunged by about 72%, while stocks have shed 21%. The market value of the cryptocurrency universe is now $855 billion, down from an all-time high of about $2.9 trillion. $2 trillion of Bitcoin “wealth” has been vaporized in just over 7 months. And to think there are over 20,000 cryptocurrencies vying to see which one can gain or lose more than the others. It’s crazy.
Bitcoin is the very definition of a speculative asset with no intrinsic value that anyone has yet discovered, whereas stocks represent ownership in established and productive enterprises. Moreover, stocks have an expected return that is a function of their future earnings, whereas holding and transacting Bitcoin involve certain costs, with no offsetting dividend or underlying asset. You couldn’t find two assets that are more different, yet their prices are moving in apparent lockstep. What is going on here?
Does the collapse of cryptocurrencies have something to do with this year’s bear market in stocks? It’s certainly tempting to think so, but hard to understand.
Late last year, I think, I made a comment or two on one or two posts to the effect that what most worried me about the future was a cryptocurrency collapse, since to my mind cryptocurrencies had essentially zero value. At the time, Bitcoin was riding high, and stocks had yet to reach a peak. Hardly anyone was predicting a Bitcoin collapse, much less one whose timing mirrored that of the stock market. It’s been a wild ride.
I welcome comments from anyone who can shed light on this mystery.
Chart #2 shows the current state of inflation expectations over the next 5 years, which have fallen from a fairly recent high of 3.7% to now just 2.6%. This is remarkable. Combined with a fairly dramatic plunge in commodity prices in recent weeks, this is the market’s way of saying the Fed should not get overly aggressive with its tightening plans. In fact, in recent weeks the bond market has actually reduced by 75 bps its expectation of what the Fed funds rate will be at the end of next year. 3% is now expected to be the high in the coming tightening cycle, vs. 3.75% just two weeks ago.
If the bond market and commodity markets are right, then the stock market is almost certainly overly concerned with the potential risks of Fed tightening.
And it’s also possible that stocks are overly concerned with the ongoing collapse of cryptocurrencies.
Editor’s note: The summary bullets for this article were chosen by Seeking Alpha editors.
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