Over the past 72 hours, the crypto market and major digital assets including bitcoin have recorded substantial gains against the U.S. dollar, with tokens rising by more than 50 percent, as financial markets struggled.
Lack of Correlation with Financial Markets
Since 2012, the crypto market has experienced a pattern of bubble-crash-build-rally, recording 70 to 90 percent corrections every two to three years. Each time the market crashed, developers and businesses focused on building infrastructures to support the next rally, creating the foundation for the next wave of capital to come into the market.
Given the tendency of the market to rebound relatively quickly following each drop, analysts generally attributed this week’s massive gains to the initiation of a corrective rally from the pioneer cryptocurrency.
Some investors justified by the sudden jump in the prices of significant cryptocurrencies to the instability in the global financial market, specifically the rapid devaluation of the Turkish lira and the trade war between Turkey and the US.
However, in an interview with Bloomberg, Matt Hougan, the vice president of research and development at Bitwise Asset Management, said that it is premature to conclude that the broader financial markets have an impact on cryptocurrencies.
Hougan stated that while there have been instances where the financial market struggled, and the crypto market found momentum, coincidence does not mean causation. He said that the fundamental drivers of crypto are different from that of equities, assets, commodities, and other currencies.
“Non-correlation is not the same as inverse correlation so there’s no guarantee that when the market goes down crypto will go up. Over the long term, we think the fundamental drivers of crypto are different from the fundamental driver of equities and other assets, and we would expect the low correlation to persist,” Matt said.
Lawrence Trautman and Taft Dorman, professors at the Western Carolina University, wrote in a paper released in July 2018 that the independent price movement of cryptocurrencies as an emerging asset class and the unpredictable nature of the entire market create a better ecosystem for institutional investors rather than individual or retail traders.
“The short-term price fluctuations may make Bitcoin a better candidate for portfolio construction at the institutional level rather than the individual investor level.”
Cryptocurrencies as a Store of Value
Like gold, in the long-term, cryptocurrencies will likely be leveraged by institutional investors and large-scale funds as the premier store of value, due to the lack of connections between digital assets and financial markets.
In a sense, cryptocurrencies operate well as a hedge against the broader financial markets, and if investors see that the market is struggling, they could allocate a significant chunk of capital into the cryptocurrency market through over-the-counter (OTC) deals as a countertrade.
For this to happen, trusted custodian solutions and investment vehicles like an exchange-traded fund (ETF) are necessary. As Multicoin Capital’s Kyle Samani said, the lack of custodianship in the crypto sector has prevented institutional investors from committing to the market.
“There are many investors where custody is the last barrier. Over the next year, the market will realize that safekeeping is a solved problem. This will release a large capital wave,” said Samani.
Currently, Coinbase, the world’s largest cryptocurrency brokerage and wallet platform, is already providing a suite of institutional products to large-scale investors. Major banks such as JPMorgan and Goldman Sachs are considering the introduction of various investment vehicles that their clients can use to move capital in and out of the market.