It has become dominated by speculative day traders
This weekend Bitcoin fell by more than 20% followed by a lacklustre rebound. This is the latest in a long-term trend; the cryptocurrency has declined around 26% since early November. Bitcoin has followed the stock markets, with the S&P500 falling around 3.5% over the same period.
The fact that Bitcoin is following the stock market is striking given the rhetoric that usually surrounds cryptocurrencies. After all, isn’t crypto supposed to be a contrarian, anti-establishment asset? Bitcoin is typically sold as an alternative to mainstream financial markets, with proponents arguing that the established monetary system is on the brink of complete collapse — and with it, they often argue, civilisation itself. Yet in terms of their actions, a Bitcoin investor who bought in November has effectively taken a bullish position on the overall stock market — leveraged seven-and-a-half times!
Once again, this is part of a broader trend. Since the beginning of the pandemic in March 2020, Bitcoin has become aggressively correlated with the S&P500. In the past two years, moves in the stock markets explain anywhere between 30% and 40% of moves in the Bitcoin market — and when the stock market has a particularly bad day, Bitcoin tends to get slammed. Bitcoin rebels are taking highly leveraged positions on the overall stock market when they buy crypto.
Strangely, this is at a time when the underlying value of crypto as a hedge against civilisational collapse should, in theory, be at its highest point. Social trust is not so much dissolving as it is evaporating before our eyes. Since the pandemic, governments have been using increasingly heavy-handed tactics to control their citizens. Large minorities are completely rejecting these tactics and becoming completely isolated from social institutions. Many more — while they might poll as being supportive of the measures — are in private, alarmed, and frightened.
So why is Bitcoin not charting a different path from the stock market? It is reasonable to think that Bitcoin has become a victim of its own success. As its marketing pitch has become increasingly credible, more and more people have bought in. But the people buying in are typically day traders. They are not investing in the long term, but rather they are obsessively watching the markets and trading on sentiment.
Professional finance types are likely exacerbating this. Whenever people in the industry see a market with high volatility, they pile in to beat the sentiment traders by better anticipating their moves. At a certain point, the pros come to dominate in the markets. No surprise that their sentiment tends to move together with the overall stock market.
Like the revolutionary Marxist who grows into becoming a Left-of-centre neoliberal, Bitcoin has grown up. It now sits in the uncomfortable position of being a Wall Street plaything; an extremely high volatility asset that finance bros are messing around with for fun and profit.