December 6, 2021 - 7:00am
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.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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Informative little article. Thanks.
Turns out Wall Street can co-opt every financial innovation, even those supposed to create an entirely new financial universe. Who’d’ve thought?
I went the other way and bought silver and gold – 🙁 Right before Powell got another term I was sure the woke Marxist was getting the FED Chair so bought a bunch of more gold at $1860 I think – it dropped below 1800 when Powell got to keep his job….
I bought my silver at an average of 24$/oz, and it has just gone sideways and sown…..I bought a bunch of gold mine stock, and it tanked….
IF only I had bought Etherium as I sort of played with…..
This entire covid response is to harvest everyone’s savings by making real interest negative (Interest-inflation, 5% negative real interest) to ‘Drive Us Out Onto The Risk Curve’ – to force us into speculative stocks, which will then crash, and so our money harvested – or let inflation devour our savings, so our money harvested. Covid Spending has resulted in $30,000,000,000,000 Trillion, printed – and coincidentally, the very wealthy have increased their wealth by $30,000,000,000,000. And now we pay for it by inflation and stock market ‘Corrections’. That is what the covid response is NOT HEALTH! All you masked sheep – you just clapped for the NHS till your pension was harvested – pensions have been eaten by this, go get your booster – and watch your savings decrease another big lump.
I no longer believe there’s a good path forward for ordinary people to protect or grow their wealth. Between inflation and likely stock market/property market corrections we’re going to take a beating.
I’ve seen you mention Ray Dalio before. I’ve watched some of his youtube videos. Obviously a smart guy who excels at describing the big picture, but he’s very coy when it comes to describing strategies for the ordinary investor to protect/increase wealth. At one point he recommended currency trading which is hardly something most people will have the time or aptitude for.
I’d love to see articles on Unherd about the likelihood of a major stock market/real estate market correction and what governments can do to restabilize the economy. They seem to have already used their ammunition: interest rates at zero and government spending very high. I’d love to see an article on what the ordinary person can do to protect themselves but I suspect the answer is nothing.
As a watcher of Peter Schiff’s youtubes I have his belief that Bitcoin is mere air, that is has No value intrinsic. The other, now almost, 13,000 Crypto’s show that.
Charlie Munger (one of the world’s most wealthy and powerful stock market people) called it immoral. Here is the thing, as I have described before:
Money is created by banks loaning it into existence. People with credit, and a item of value back a loan, secure it. Ideally it is something which will produce income. Say a Bulldozer or a convenience store, or ones house. As the payments go back to the bank they get their interest – and the principal retires the debt and goes back to money heaven of non-existence. The Money Created by the loan increased the wealth of society, it was PRODUCTIVE.
Bitcoin is pure Speculation. Its market cap is now a couple Trillion! It has produced Nothing. Thus a couple Trillion have appeared into existence (by inflation the value – not because people paid those trillions). So the world’s money supply increased by a couple Trillion with NO productivity to give it value – THUS it is merely more $ on balance sheets – which devalues all the other $ by that amount.
It is a vampire. It grew in value, but added NO value, so it merely took value from the money which was created by productivity.
It is like the government printing two trillion. Nothing was produced = but $2,000,000,000,000 more $ are chasing the same number of goods and services – thus all the money is devalued by $2 Trillion – Just as we see the inflation from covid printing – it debases the existing dollars as no more goods were produced, just more Dollars.
It is not an asset as it is merely an imaginary zero and one series, and one day will go back to nothing of value – but the resulting loss of those Trillions which have now been placed on the balance books – disappears, and like the default of Lehman’s caused the GFC (global financial collapse 2008), and Evergreen’s devaluation is shaking up China – these things who are imaginary $ Still carry disastrous results when they disappear….Bit coin does no one any good but the fortunate speculator, and destroys the unfortunate – it produces nothing, makes no jobs, it is fugazi…
wolf of walstreet – fugazi – great fun… https://www.youtube.com/watch?v=rnClIOoYCFg