Bitcoin and S&P correlation tighten, IMF warnings highlight crypto risks
The S&P500 and Bitcoin are now more correlated than ever, and IMF warnings say they could be at risk now.
The cryptocurrency markets and the S&P500 started distinctly moving in tandem in March and that correlation has continued ever since. While a lot of speculators were hoping and predicting that Bitcoin would strike out on its own at some point, that just hasn't happened.
If anything the correlation is now tighter than ever.
That's bad news for the crypto markets, because the warnings of the disconnect between the stock market and reality are only growing louder.
In terms of a metaphor that might be more colourful than accurate, what may be happening is the S&P500 is locked in a small room, fevering away on a filthy mattress and vividly hallucinating that it's in a world without coronavirus. Every time it whimpers and stirs the Federal Reserve hits it with an undiluted cash injection, sending it back to dreamland. The International Monetary Fund (IMF) is outside banging on the door and begging it to wake up.
IMF director Kristalina Georgieva did not mince words in a press conference at the start of April, pointing out that the economic fallout of the virus was already way worse than 2008 and that the worst was yet to come. Prematurely lifting quarantines would risk an "even more severe and prolonged" economic downturn, WHO director-General Tedros Adhanom Ghebreyesus said at the time.
Since then, stocks have gone up to scrape their previous all-time highs and quarantines have been prematurely lifted.
By mid-April the IMF was forecasting the worst economic contraction since the Great Depression of the 1930s.
"Public finances will be shredded, unemployment will rise sharply and in 90% of the IMF’s 189 member countries incomes per person will fall," FT paraphrased the IMF as saying. And stocks kept going up.
In mid-May, Georgieva confessed that previous assessments might have been a little too optimistic and that forecasts could well be revised even further downwards. And stocks continued to go up. That downwards revision came this week, with the IMF dropping its 2020 estimates of global economic growth to -4.9%, a full 1.9% down from its April forecast. In response, the stock market fell slightly, dragging Bitcoin prices down a bit with it.
The bigger they are, the harder they fall
Right now the S&P500 is still considerably higher than it was all the times in the previous months when the IMF was warning of further collapse. If it was disconnected from reality a month ago and two months ago and three months ago, it's even more disconnected now.
At the same time, the IMF flagged that this month's report, which is already basically at "the end is nigh" levels of pessimism, might still be a little overly optimistic given the backlash that could occur when the markets reconnect with reality.
"The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects – as the June 2020 Global Financial Stability Report (GFSR) Update discusses – raising the possibility that financial conditions may tighten more than assumed in the baseline," the report noted.
If the financial markets get abruptly yanked back by the rubber band of economic realities, which is looking increasingly likely per the IMF, current correlations strongly suggest it's taking crypto down with it.
On the other hand, that could be exactly the sudden shift needed for Bitcoin to break its correlation.
But on an entirely different hand, maybe stocks can only go up and so does Bitcoin. After all, it's only a Ponzi scheme if it collapses.
Disclosure: The author holds BNB, BTC at the time of writing.