Crypto Markets-Equity Markets Correlation
The recent crypto market weakness has been exacerbated by general equity weakness. People are massively de-risking after a successful banner year for cryptocurrencies, equity, and commodities. Whales, institutions, and high-net-worth individuals are offloading to crypto newcomers.
Crypto markets mimic the stock and markets; investors taking profit after a successful year saw a drop in demand for equities and stock. The resulting price drop reflects strongly in cryptocurrencies as the market as a whole is now down 10-20%. Crypto being a volatile asset class means that any moves made in the stocks and equities market would be reflected in the crypto markets.
This stock market-crypto market correlation seems to break sometimes, however, as we have seen recently when cryptocurrencies rallied to their ATH as the stock market dragged on, or in May 2021, when BTC suffered as the stock markets remained steady. Analysts are however well aware of BTC’s (and crypto’s in general) ability to act as a hedge against all rising trends of commodity and food prices.
Value Framework vs Momentum Framework
Whereas people approach BTC from a historical context where BTC is a straight momentum-driven asset, a value-driven approach is perhaps more useful as one considers that BTC would go through these inflection points on its generally upward trend.
The momentum approach says that BTC was green today so it will be green tomorrow, and is easy to figure out. Value is much more complicated to figure out, as different parties view value differently.
BTCs bullish run is from institutions allocating to crypto, which are driving the market now. Whatever they consider being the most valuable feature will therefore be the biggest driving factor.
Institutions have also started looking into altcoins, having secured their BTC entries. This means that mass adoption inflows are now more spread amongst different altcoin projects, which hurts BTC as the flag-bearing crypto asset.
The BTC-Shitcoins Prisoner’s Dilemma
In the Prisoner’s Dilemma, the decision-maker is incentivized to act in a manner that’s less than ideal for the overall collective outcome.
As a buyer, you’re incentivized to defect and buy shitcoins to perform better than people who hold just BTC. But if too many people defect from buying BTC, high correlations in the market will see BTC, therefore, trend downwards which in turn also sees all the shitcoins trending down.
Institutions Are Taking The Plunge (ETH, ADA)
Institutions just now buying into ETH and other altcoins, what could happen (like it did with BTC) is that nimbler hedge funds might be buying a little faster than bigger institutions, which could see an ETH rally kick-off. This would in turn see the ETH price skyrocket much sooner than expected.
Knowing that slow institutional money has been approved to come into ETH in Q1 2022, fast money could reposition into ETH, SOL, and ADA, in anticipation.
Sound Money Total Addressable Market (TAM) vs Smart Contracts TAM
ETH has changed its monetary policy one too many times to inspire user comfort as a sound money option. However, ETH remains an awesome bet for smart contract adoption and usage in general. More people are waking up to the fact that smart contracts have a much larger TAM than sound money.
ETH should rather focus on being the best smart contract platform than try to compete with BTC as a store of value and inflation hedge. This would place ETH in the best possible position, given that both retail and institutional clients have started to allocate to smart contract platforms.
BTC remains a macro asset whose theory as an inflation hedge is currently being tested, especially considering the current mass adoption rates that indicate that we are well on the path to capturing the full Bitcoin market.