Crypto lagging stocks
The past week has seen a slight uptrend in the market. The price of the largest cryptocurrency, Bitcoin (BTC), increased by about four percent, while the price of second-largest cryptocurrency, Ethereum (ETH), rose by around two percent. Total value of the broader cryptocurrency market (excluding the largest stablecoins) (TOTAL3-USDT-USDC) rose even more, by about eight percent.
However, this seemingly strong price action on a weekly level needs to be put into context. Last Thursday marked a local bottom in the cryptocurrency market, and the rise over the past week has been a rebound from this bottom. When looking at a two-week timeframe, there has been no significant change in the total value of the cryptocurrency market (TOTAL); instead, there has been a rotation of capital, with Bitcoin and Ethereum performing below the market average and altcoins performing above the market average.
The strengthening of altcoins over the past two weeks should also be considered in the context of recent months. Since early May, altcoins have been in a relatively steep downtrend against Bitcoin. This decline reached a local bottom during the sharp market drop seen in early August, after which altcoins have strengthened against Bitcoin. At the moment, we still consider this just a post-bottom bounce rather than a particularly convincing sign of strength in the altcoin market relative to Bitcoin.
Crypto lagging behind stock market
The crypto market has been moving sideways over the past two weeks without a clear trend. This brings us to the main theme of this Pulse newsletter.
The sentiment in the cryptocurrency market over the past two weeks could be summarized with the question: “Prices should be rising, so why aren’t they?”
In the financial markets, there have been many elements present that typically signal an increased risk appetite. The most obvious of these has been the strong rise in stocks. In the graph below, you can see the NDX index, which its typically correlated with Bitcoin's price.
From the graph, it is evident that while Nasdaq has risen strongly, Bitcoin has struggled in a sideways movement.
Similar signs can be seen in the bond market. The rise in high-yield corporate bond ETF prices often indicates an increase in market risk appetite and often correlates with Bitcoin price. In the graph below, representing high-yield funds, we have iShares’ HYG.
The story is largely the same as with Bitcoin and Nasdaq.
As a third example, we take a look at EURUSD currency pair. A weakening dollar often indicates increased risk appetite, which is why EURUSD typically correlates with Bitcoin's price.
Again, the story is the same. EURUSD is soaring, while BTCUSD struggles in a sideways movement.
What’s going on?
It would take considerable self-confidence to say with certainty where this apparent discrepancy comes from. However, we can offer two alternative explanations, each with its own logical basis.
The first explanation is that the lackluster performance of the cryptocurrency market, while other risky asset classes are soaring, simply reflects the sector’s relative weakness. This interpretation is supported by the broader context in which the cryptocurrency market has been unable to achieve new highs for almost six months, even as the stock market has continuously pushed upwards. The accompanying graph shows Bitcoin’s price and the NDX index from early April, with their descending and ascending 50-day moving averages.
The trend reversal between Bitcoin and Nasdaq is even clearer when examining their ratio. Since late April, Bitcoin has systematically weakened against Nasdaq.
This trend would suggest that the cryptomarket’s moment as a leading risky asset class would simply have passed for time being. Consequently, despite increased market risk appetite, capital may not be flowing into the cryptocurrency market as seen earlier this year, resulting in the cryptocurrency market weakening relative to other risky asset classes.
The second possible interpretation might be:
“Let’s not jump to conclusions just yet.”
It is important to keep in mind the short-term price drop seen in both the stock and cryptocurrency markets in early August. This was due to a significant reduction in risk levels by many investors at the same time.
This interpretation would suggest that, a little over two weeks after the event, we are still recovering from this market de-risking. Capital may still be returning to the riskiest assets. Often, this happens in stages along the risk curve—first to S&P 500 stocks, then to the NDX index, followed by the riskier assets like Bitcoin, and finally to very high-risk assets such as altcoins. Given this typical sequence, it would not be surprising that the cryptocurrency market has lagged behind the stock market over the past two weeks.
Proponents of this interpretation might point to last Thursday (August 15, 2024) as the bottom of the BTC/NDX ratio and suggest that Bitcoin has since started to strengthen against Nasdaq, rising above its ten-day moving average in recent days, which could be seen as the first glimmer of hope for the beginning of an uptrend.
In conclusion, we have two alternative interpretations:
1. Crypto market has not started an uptrend DESPITE the stock market's uptrend.
2. Crypto market has not YET started an uptrend like the stock market.
Which one is it? We will likely get an answer within the next week or two. To monitor this, we primarily recommend keeping an eye on the BTC/NDX ratio mentioned earlier. Bitcoin’s or other cryptocurrencies’ dollar-denominated prices may be affected by a potential correction in the stock market following a strong rise. Such a move would not be surprising, and based on the Relative Strength Index, it might have already begun (as of August 22, 2024, 7:15 PM).
Small downward movements in the stock market are likely to also drive down the dollar-denominated prices of cryptocurrencies, which could make it harder to detect the relative strengthening of the cryptocurrency market. If Bitcoin can maintain its relative strength against Nasdaq, it would be a sign of resilience in the cryptocurrency market and sustain hopes for an uptrend in the cryptocurrency market as well. Based on today’s (Thursday, August 22, 2024) short-term graph, the minimal impact of the stock market’s dip on Bitcoin’s price suggests that this resilience might indeed be present.
The situation is thus quite complex and interesting. We will closely monitor the development of the cryptocurrency market and report back in our next Pulse newsletter, so stay tuned!
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