Stock & Crypto Markets Plummeting Down. Any Correlation?

Stock & Crypto Markets Plummeting Down. Any Correlation?

Within the past days, both stock and crypto markets have been heading downwards. Both of them started showing some drastic trends on Friday, February 2 and continued playing out this week. Here’s whether there is any relationship between the two markets.

Stock Markets Sinking

Volatility is back on traditional markets. After a phenomenal period of over 400 days for American equities without even a slight downturn of over 5%, things are changing. For example, the American stock market index S&P 500 (The Standard & Poor's 500) in two days lost over 6%.

According to The Financial Times, the last one was originally prompted by rising bond yields. However, as the media outlet points out, investors and experts say that the pivotal role, in this case, has been played by trading strategies, connected to volatility, which has been quite moneymaking.

As Reuters reports, stock markets, on the whole, have been going wild, as higher interest rates and sodden valuations blurred $4 trillion out, and just nearly a week ago those had been exclusive highs.

To take a handful of examples: Europe’s top stock exchanges were down about 2.5%; Wall Street futures contracts experienced losses as well. At the same time, “fear gauges” of market instability soared to their maximum rates since sudden fall of China’s public currency three years ago.

Because of the fall in European markets, the local STOXX 600 index saw its inferior rate within the past half a year. In the meantime, casualties for MSCI’s extensively traced 47-country global index hit $4 trillion as its fall since February 2 came close to 8%.

Natixis Investment Managers' Top Rialto Strategist – David Lafferty – commented the situation in the following way:

“This is not the end of the bull market, but it is the end of the super low volatility regime. The last two days of trading have thrown a giant bucket of cold water on the short volatility trade, and I think we’re now in for a prolonged period of elevated volatility generally.”

It is essential to add that on Monday, February 5, several indexes demonstrated surprisingly downward benchmarks:

  • Wall Street’s Dow Jones plummeted by 4.6%
  • S & P 500 plunged by 4.1%

These are their most considerable declines since August 2011.

Furthermore, the result, the Dow displayed on Monday, was its massive historical drop, based on pure points.

Crypto Market Slumped in Red

The market of cyber assets has not been feeling better within the past time. However, the crypto market has been sweepingly heading downwards since January 7, when the total market cap reached its all-time high of $829 billion. By now, the cyber currencies market has lost 65.8% of its value, decreasing to the margin of $283 billion.

Remarkably, bitcoin, as the most known cryptocurrency in the world, was the most responsive asset to all the changes in the industry. Starting falling more or less radically on February 2, today it reached the low of $5,947, losing 65% of its value since the beginning of 2018.

The other crypto-coins have also been suffering from the correction. Predominantly sunk in red, they have been losing from 1% to 30% of their value daily for the last time.

Is There Any Connection Between Stock & Crypto Markets Losses?

Jake Sylvestre, the founder of PhishTrain and a cybersecurity expert, in his article for CCN explains how the rates on stock markets correspond with the gyrations on the cyber money market.

Analyzing the info, represented by Sifr Data, the expert points out that S&P 500 index has a “weak positive relationship” to Bitcoin, fundamentally, because of a z-score. This is a signed number of standard deviations, which represents the route and strength of the correlation between the two suites of data.

“A higher absolute z-score means greater correlation, while a lower absolute z-score means less of a correlation. Whether the number is positive or negative indicates whether the relationship is direct or inverse,” explained Sylvestre.

At the same time, as the author emphasizes, VIX’s z-score demonstrates a “moderate negative relationship.” It is important to mention that VIX index is the “fear-gauge,” mentioned above, and it represents the equity market’s unsteadiness. Sylvestre concludes that there is an opposed relation between VIX and BTC.

Therefore, should the fears in the market rise, bitcoin’s price will drop. But if the concerns plummet, bitcoin’s price will soar.

Correlation Examples

Interestingly, as Business Insider noted, money was piled into cyber assets at the time, when the traditional stock market was experiencing a sell-off on February 5.

The media outlet paid attention to an interesting peculiarity: as stock markets kept sinking on Monday, some investors poured some of their funds into alternative assets – virtual currencies.

In particular, on that day the stock market underwent severe casualties, whereas cyber assets saw slight increases in prices. About 3 PM ET the Dow Jones index was going through a nightmare 1,500 point sell-off. In the meantime, the total crypto market capitalization, as BI points out, started sweepingly going up. It went up from $310 billion to $335 billion by 4 PM ET.

At the very same moment, however, the ‘king’ of all cryptos bitcoin was falling by 14%, whereas its ‘little brother’ ether was climbing up by 12% and Ripple – by 11% up.

Notwithstanding the above, it is quite confusing to find a direct relationship between the gyrations on traditional and cyber assets markets, as there are a plethora of various factors that prompt drastic changes on both sides. And if in the conventional market those could be the changes on views of investors, a shift in tax policies in different countries, e.g., the US, and growing fears, the crypto market plummeting might be prompted by entirely different conditions.