Why Interest Rates, Stocks, and Crypto Are Sometimes Correlated

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After learning more about the Federal Reserve’s increasingly hawkish intentions to hike interest rates this year, in part to control inflation, the NASDAQ fell more than 3% on Wednesday and the S&P fell by almost 2%.

But here’s the problem: Cryptocurrencies have plummeted as well. Bitcoin was down 5%. Ethereum fell almost 7%. These are the same cryptocurrencies that we were told do not follow normal currency and stock rules.

But it looks like they somehow do.

For some people, cryptocurrencies are like gold a place to store and protect your money.

“As a hedge against inflation,” said Christopher Vecchio, senior strategist at Daily FX.

On Wednesday we learned that the Fed is preparing to be quite aggressive in the fight against inflation.

“Well, with the expected decline in inflation metrics, if that’s one of the reasons people invest in cryptocurrency, then there’s less need to have a long crypto,” Vecchio said. .

So in this way the cryptocurrencies acted like gold and the price went down. Now, for some people, cryptocurrency isn’t about inflation; it’s really just a long-term game.

“Most value propositions are about things 30 years from now. That means the payoff is long into the future, ”said James Angel, professor of finance at Georgetown University.

But when interest rates suddenly rise here and now, long-term bets look less appealing. And in this way, the cryptocurrency acts a lot like those high-flying tech stocks on the NASDAQ. They too had big dreams for the future, and investors were a little fed up with the cake in the sky.

Speaking of shattered dreams, when the market crashes it also means “less money to play with people in the crypto market,” Angel said.

In fact, when things go wrong in the wider market, people will withdraw money from cryptocurrencies to save money, especially when the markets are closed.

“Right in our modeling,” said Stéphane Ouellette, CEO of FRNT Financial, “[a] clear correlation between accelerated sales and North American equity hours.

So in this way the cryptocurrency acts a bit like perhaps the oldest investment, a wad of cash under the mattress for emergencies.

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