Over the last ten months both stock prices and crypto prices have fallen dramatically. Another warning of more trouble in stocks came from Citigroup who ran up a red flag based on too many analysts being too optimistic. This may sound a little strange but it turns out that both in 2000 with the dot com crash and 2007 with the Financial Crisis crash it was the case that excessive optimism preceded very dark times for the market. If this is the case, will crypto continue to follow the stock market?
Cryptocurrencies Go Down With The Stock Market
It has been disappointing, to say the least, for cryptocurrency enthusiasts that Bitcoin and the rest did not act as a hedge against inflation or a safe haven of value over the last ten months as inflation has hit its highest level in four decades and the Dow, S&P 500, and Nasdaq have all suffered substantial losses. Crypto currencies were supposed to be a safe place to have your money during times of political and social unrest as well as times of war. What has happened is that Bitcoin and other cryptocurrencies have tracked most closely to the Nasdaq as both have fallen. In addition, there have been stablecoins that have gone under when these were supposed to be the safest of the safe.
Predicting What Bitcoin Will Do Next
When we started 2022, Bitcoin promoters were saying that the cryptocurrency would surpass $100,000 during the year. This was after it had fallen from $67,000 in November 2021 to $47,000 to start 2022. Celebrities were promoting Bitcoin as the path to untold riches. And now Bitcoin trades in August for half of what it sold for in January of 2022. Eventually, we believe, Bitcoin and other cryptocurrencies will hold values consistent with their usefulness in the real worlds of decentralized finance, the Metaverse, and NFTs. Meanwhile, the only reliable indicator of Bitcoin value has been the Nasdaq and, to a lesser degree, the Dow and S&P 500. This is why we bring up the subject of whether or not crypto will continue to follow the stock market.
Fighting Inflation Leads to Recession
When the Covid pandemic shut down the world economy there was the risk of a depression as bad as the Great Depression of the 1930s. The stock market crashed. The US and other nations responded by flooding the economy with money. People got cash payments, the Federal Reserve purchased bonds, and the stock market started to recover. As the stock market resumed a bull run Bitcoin went from $5,000 to $60,000. As many noted the stock market was not the economy and it took about another year, vaccines, and a million deaths in the USA for Covid to reduce its effect on the economy. There was a lot of pent up demand and cash on the sidelines that people started to spend. Meanwhile the global supply chain had not recovered and has not recovered yet. On top of that Russia invaded Ukraine and the US and EU quit buying from Russia and excluded them from the international banking system. The end result of all this has been the worst inflation in forty years.
In response to inflation the US Federal Reserve is raising interest rates and that is virtually guaranteed to bring on a recession. With a recession the stock market will fall again. Thus, if you are following the market, and especially the Nasdaq, to see what Bitcoin and the rest will do next, you may want to hold off on buying Bitcoin and ignore the celebrities and wealth bitcoin promoters for now until inflation is wrung out of the economy and the coming recession is over.
Will Crypto Continue to Follow the Stock Market? – SlideShare Version