No, Tech Stocks Aren’t Driving Crypto Prices

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January 23, 2022

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Bitcoin (BTC) - $35,165.70

Ether (ETH) - $2,414.45

Prices as of 1/23/22 @ 14:50 p.m. UTC

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Welcome to Crypto Long & Short. It’s been a tough time for those long cryptocurrencies. Bitcoin is down 18% from where it was a week ago and ether plunged 27% over the past seven days. Many are pointing to weakness in the tech sector for crypto’s woes, but the data shows it’s not as strong of a relationship as one might think.

– Lawrence Lewitinn, managing editor for global capital markets

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The Briefing

Crypto prices were crushed this past week and when such events happen, many seek out a culprit.

We’ve been noting that demand for bitcoin and ether was drying up (“Of course, this doesn’t mean muted markets can last forever, but in the coming days or weeks, one shouldn’t be surprised if prices drift south,” I warned in last week’s column). That answered the question “what?” but not “why?”

One persistent, common myth about crypto may seem perfectly reasonable but doesn’t hold up when the data is analyzed. That myth is that cryptocurrencies trade closely with tech stocks and certainly more so than with the overall market.

With a selloff in tech giants coinciding with bitcoin’s plunge this past week, this theory is gaining traction.

At first blush, there’s a lot of reasons why that would make sense. Buying cryptocurrencies – not just bitcoin, but any of them – is a bet that the technology will be adopted by more users. Something that is the future of money (and art and data management and …) that has fewer than 40 million non-zero balances as bitcoin does will only go up from there, since the world’s population is 198 times that amount, the thinking goes.

Thus, one would expect the new technology narrative to far outweigh the inflation hedge narrative, which is an integral part of bitcoin's origin story. Yet is that really the case?

The data says … not exactly.

The favored proxy for the tech sector, the Nasdaq 100, is packed with giants in the space: Apple, Microsoft, Amazon, Meta (aka Facebook), Tesla and Alphabet (aka Google), which accounted for 43% of the index’s value as of Dec. 31. And while there are other sectors like consumer services or healthcare, even those are tech-heavy. Activision Blizzard, Electronic Arts and Netflix are categorized as “communication services,” for example.

Using bitcoin as a proxy for crypto overall – not perfect, but bear with me – we see the correlation coefficient between the largest cryptocurrency by market cap and the Nasdaq Composite (using a 90-day set) is 0.22. That’s positive, but weak.

Yet the narrative of bitcoin offsetting the devaluing dollar is even weaker than the one about it being a tech-related investment. The correlation coefficient between bitcoin and the U.S. Dollar Index is just -0.13. Against U.S. bonds, represented by the iShares 20+ Year Treasury Bond ETF (TLT), it is just -0.02. In other words, no relationship at all.

All this is to say that there are likely other factors that can explain the current state of the crypto markets. For example, given the major moves in the past year have all tied with regulatory action in China, it’s hard not to see the connection between those events and bitcoin’s price path.

For the time being at least, one could say bitcoin’s prices are a combination of some global risk appetite and a lot of the market dynamics in China (and the aftermath of restrictions there). Those factors’ influences aren’t static, but they explain a lot more than watching the Fed’s every move.

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Chain Links

Financial services giant Jefferies expects the NFT market to reach an $80 billion market capitalization by 2025. TAKEAWAY: After appearing to hit its peak during August, the NFT market came roaring back in January. OpenSea alone has done $4.2 billion in volume during the first 20 days of the year. While tough to measure accurately, the current NFT market cap nears $31 billion. Jefferies estimations may be low considering the current traditional art market capitalization is estimated around $60 billion.

Andreessen Horowitz (a16z) eyes two new crypto venture funds totaling $4.5 billion, one of them set to be the largest in industry history. TAKEAWAY: New capital appears hungry for the next wave of crypto startups, as Paradigm and a16z take turns raising mega funds within the space. While large funds investing in early-stage projects is likely good for innovation, it also has the potential to fragment liquidity within the current market. Too many token launches within a short span of time can spread capital thin, dragging down asset prices across the relative market.

iTrustCapital, a crypto IRA platform, raised $125 million at a $13 billion valuation. TAKEAWAY: The platform will allow users to transact with several cryptocurrencies while maintaining the tax benefits of an IRA. Furthermore, the company is exploring potential options for integrating staking services and DeFi bringing the growing crypto market to more traditional investment accounts. The newfound accessibility may make crypto a more significant part of a balanced retirement portfolio.

Grayscale’s Bitcoin Trust is now trading at a record discount of 26.5% below net asset value. TAKEAWAY: The Grayscale Bitcoin Trust traded at a premium to Bitcoin for years as institutions used the product for exposure to BTC. Access to bitcoin became easier during 2021, and GBTC has underperformed its underlying assets, creating a massive discount to fund holdings. Investors may find interest in buying discounted shares in hopes that the trust might turn into a redeemable spot ETF. (Editor’s note: Grayscale is a subsidiary of CoinDesk’s parent company, Digital Currency Group, and is a client of CoinDesk Indices.)

– Teddy Oosterbaan, research analyst

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