Cryptocurrency and the Stock Market.
Reaching all-time high price values, Bitcoin has drawn global attention to the idea of investing in cryptocurrencies. Bitcoin reached a value of $61,195 early in March 2021 and is expected to scale new heights. Cryptocurrencies have moved from being in the shadows and negatively associated with the dark web to almost taking centre stage on the global economic platform, drawing attention right from the common man to established investors.
Up until recent times, cryptocurrencies, especially Bitcoin maintained little to no correlation to traditional stock markets but in 2020, Bitcoin alerted the world of it’s record-breaking price high when Stefan Thomas forgot his password and missed out on claiming $220 million worth of Bitcoin that he had invested in a couple years ago.The recent peak in value set off an increased correlation to stock and commodity movements.
This new digital currency has ushered in the next level of digitization of the global economy with it’s growing acceptance. An instrument associated with high potential returns(at the cost of high risk) is bound to raise curiosity over the impact of it on the stock market. Several reports have shown a positive correlation between Cryptocurrency and the S&P 500(the correlation between Bitcoin and S&P 500 was 0.50 in October). Better the performance of cryptocurrency, better the performance of stocks.
Stocks are legally backed financial instruments of exchange which operate in major recognised stock exchanges across the globe, adding credibility and security to present and potential investors.
Cryptocurrencies are multifaceted. While stocks can be exchanged exclusively on the stock market, currencies such as bitcoin can be treated similar to stocks (the classic buy low sell high principle) as well as be accepted as a mode of payment. Recently, Tesla announced Bitcoin as an acceptable form of payment hence assimilating this financial instrument into the economy a bit more.In addition to this, PayPal also now accepts cryptocurrency in addition to corporate giant McKinsey and Company dabbling in the game.
Yet the legal status of cryptocurrencies remains questioned. Looking not too far from home to begin with, cryptocurrencies were banned for exchange in India in 2018 but were given legal ascent again in March 2020. Speculation still surrounds a possible ban in the future, making one wary of parking long term funds.
Globalisation has shrunk the world socially, commercially and most importantly, economically. Ripples of economic events are felt through global stock markets in the blink of an eye- making volatility a vital characteristic of this currency. Several experts and strategists have expressed concern over the additional speculation that is brought about by such universal currency. Often associated with extreme price movements, this poses danger to stability of global stock markets. Between April 2020 and March 2021, the price of Bitcoin jumped upwards roughly by over $54,000.
Rakesh Jhunjhunwala- India’s Warren Buffet and Warren Buffet himself have both expressed concerns over the increasing importance of this new entrant. Hence a signal of caution, from investors who are known for their strategic investment decisions from which they have amassed a fortune from the stock market, is advice that certainly holds weight.
The former had expressed earlier this year that he would not even buy Bitcoin for $5 and express scepticism over its credibility as opposed to sovereign-printed currency owing to it being “speculation of the highest order”.
On the other hand, digital currencies have also elicited a positive response from some as well. Benson Durham, head of quantitative global policy analytics at Cornerstone Macro LLC and his colleague Roberto Perli are of the opinion that investing in digital currency adds diversification benefits to a portfolio and can cushion sudden and drastic market movements. In addition to this, there is also a decreasing correlation between cryptocurrencies themselves- leaving the investor with options to explore based on individual analysis.
Cryptocurrencies have caught the eye of the generation that lives by the motto “Out with the old and in with the new” A bout of questions have sprung up which are yet to be answered by future economic events and popular attitudes- will cryptocurrency replace cold hard cash? Will this universal currency rub shoulders with or replace the US Dollar standard? It certainly remains a phenomenon to reserve your curiosity for.
