Cryptocurrencies have been on a wild ride for most of 2018 but the recent drop in value seemed to mimick the general trend of the stock markets this week. Is there a correlation between the two and can the stock markets actually cause crypto prices to move up or down?
If, like us, you woke up to a slew of news claiming that stock markets from around the world are on a downslide this week, you may be thinking this could explain the recent cryptocurrency price drop, right? Well, not quite.
I haven’t been following the news, can you get me up to speed?
In case you missed the news, stock markets in the US took a serious hit this week. Prices tumbled over concerns of an interest rate hike and the effects resonated across the Asian and European markets, which also took a serious dive.
Around the same time, crypto markets also started to dip, averaging a loss of 25% of the price of every major cryptocurrency. On Tuesday, Bitcoin and Ripple were trading down 23% while Ethereum took an even deeper dive of nearly 28% in the last 24 hours.
So, did stock prices cause crypto to plummet?
Many have suspected the news around stock markets plunging was the main driver for the recent crypto price crash, but we see things a little differently.
First of all, the value of cryptocurrencies tend to move independently to stocks, bonds or any other financial assets - in financial jargon, we say that the two are uncorrelated. The fact that cryptos are now moving in the same direction as stocks can be explained by a general sense of fear among the wider investor community.
Secondly, a 6% gain in Bitcoin prices just as the stock markets were starting to plunge on Monday, suggests that at least some investors were actively moving money from the abnormally volatile stocks and piling it into Bitcoin, as well as Ripple and Ethereum.
But if it wasn’t stocks, then why did crypto prices fall in line with stocks?
In general, it is very hard to single out just one culprit to be held accountable for a massive market movement. Here at Revolut, we believe the sudden drop in the value of cryptocurrencies has a number of root causes, while the negative sentiment from plunging stock market prices acts as a catalyst by promoting fear.
Although many governments talk about future plans for providing a legal framework on cryptocurrencies, for the most part, they remain largely unregulated. However, some parts of the world have started to make a move on the matter.
China has recently revealed a move to ban all crypto-related commercial businesses and block both domestic and offshore crypto trading platforms, while India said the country doesn't recognize bitcoin as a currency and that it would take steps to stop crypto payments within their territorial borders.
Despite a number of well established players in the financial landscape have begun experimenting with blockhain technology, in a bid to build more effecient systems, others have decided to steer clear of the volatile world of crypto.
Just this week, a number of tier one banks have agreed to impose restrictions over buying cryptos through credit cards, while the major card networks have also adjusted their fee structure for processing cryptocurrency related transactions.
Interesting, but where do we go from here?
The last few months have been a wild ride for the entire crypto world as prices retracted from the end of last year. It is only natural that a correction occurs, as this could potentially leave room for healthier price action going forward.
Although recent events in the financial world suggest that stock markets can have a profound effect over the cryptocurrency space, there needs to be much more supporting evidence before this claim can be substantiated.
In general, 2018 could be dominated by new regulatory developments from governments around the world, as the major cryptocurrencies become even more mainstream. The truth is that no one can really tell for sure what the outcome will be, but the reality is that cryptocurrencies are here and they are already disrupting trillion-dollar industries, with the potential to innovate and to transform the financial world in its entirety.
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