Does the Recent Stock Market Decline Have Anything to Do With Bitcoin?
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.
The US stock market recently posted its worst week since Jan. 2016, when weak economic data from Chain sparked a global selloff, an event that rekindled worries over global economic growth. Over the five days between March 19 and March 23, US stocks fell roughly 6 percent, European stocks were down roughly 4 percent, UK stocks were down 3.4 percent and Asian markets were down by up to 4 percent, with Japan faring worst by declining over 5 percent. The decline in the stock market came in a month in which Bitcoin declined by over 35 percent to bring the first quarter loss of the cryptocurrency to 47 percent.
On the first market day of the second quarter, the S&P 500 Index dropped by 2.2 percent, the poorest start to the month of April since the 1929 Great Depression, data from Bloomberg showed. By close of market on April 4, the stock market had recovered from the April 2 slump with the S&P 500 Index closing 1.3 percent higher and the Dow Jones Industrial Average closing 1.7 percent higher. By comparison, Bitcoin prices have been relatively flat since the start of the month.
For a number of reasons, one of which is the fact that stocks benefited from the surge in the cryptocurrency market last year, it’s possible to think that the recent struggles in the stock market has to do with the dismal performance of Bitcoin this year. Indeed, Bitcoin’s decline may have influenced stock prices, but such influence is marginal. The stock market decline was down to worries over global economies.
Fears over US vs. China trade wars
At the heart of the latest selloff are worries over potential trade wars that are likely to ensue from the Trump administration’s move to impose tariffs on up to $60 bln in Chinese imports. The US government had conducted an inquest, dubbed the “301 investigation,” into suspected unfair trade practices by China.
The US government will publish a list of targeted products in April. Robert Lighthizer, the US Trade Representative who led the inquest, told legislators on March 22 that aeronautics, modern rail, new energy vehicles and high-tech products would be subject to the new tariffs. Lighthizer admitted that China is likely to retaliate by targeting agricultural products from the US, which rely on the Chinese export market.
The Trump administration has been upfront about its intention to protect American goods and the latest tariff plan proves that the government is serious. Trump will reportedly consider taking further actions against China in coming weeks, depending on the response to the first phase of the tariffs.
The potentially negative effect that the tariffs and future actions that the Trump administration might take on international trade will have on the bottom line of US companies that rely on international trade is partly what sent stocks lower recently. This has been the consensus on Wall Street. As Brad McMillan, chief investment officer at Commonwealth Financial Network wrote in a note obtained by MarketWatch:
“For companies that sell to China, or indeed any country outside the US, the effects are likely to be negative—which is why markets are reacting again. Even the best-case results would still be worse, economically, than where we are now.”
Bruce Bittles from research firm Baird told CNBC “the market has been priced for perfection,” leaving the “market vulnerable to surprises” like the worries over potential trade wars. Ian Winer, the head of equities at Wedbush Securities added:
"A global trade war, whether it's real or perceived, is what's weighing on the market. There's this huge uncertainty now. If China decides to get tough on agriculture or anything else, that will really spook people.”
“We’ve got a confluence of events: We’ve got some Facebook going on, some trade war going on, and higher interest rates going on,” Paul Nolte, portfolio manager at Kingsview Asset Management, Chicago told Bloomberg.
Social media privacy issues
Facebook has been under fire for how it handles user data following news that Cambridge Analytica mined data of 50 mln Facebook users without their permission. This sent shares of Facebook down roughly 13.8 percent in the week ended March 23 and the stock is down roughly one percent in the month-to-date. The revelation put pressure on tech stocks at large over heightened concerns that they might not be doing enough to protect user data. iShares U.S. Technology ETF, which tracks the performance of the Dow Jones US Technology Sector Index fell from $182.95 a share on March 12 to $165.68 a share on March 23. The ETF closed at roughly $168.18 a share on April 4. Typically, if tech stocks struggle the way they did, the overall stock market is definitely going to take a hit too.
Jaime Cox of Harris Financial Group, Richmond, Virginia declared the worries of entire tech:
"The entire technology complex is worried about what [Facebook founder] Mark Zuckerberg said last night [March 21], that maybe ‘we should be regulated’". All of a sudden you have all of these technology companies that are going, 'I can't believe he said that,' because that would basically hurt technology companies' earnings potential."
Simply put, the two events highlighted above — trades and data security — are at the heart of the recent struggles in the stock market. The global selloff of stocks in February triggered by worries over a potential interest rate hike by the US Federal Reserve also influenced market reactions to recent events as well.
On the other hand, Bitcoin’s struggles have been down to its acceptance, or the lack thereof, on various levels including regulators and companies. The Wall Street Journal reported at the end of February that the US Securities and Exchange Commission (SEC) has “issued dozens of subpoenas and information requests to technology companies and advisers” involved in the cryptocurrency space. As more details of the SEC inquest became available at the beginning of March, in addition to a report in Bloomberg that suggested the Bitcoin regulation that the Chinese government imposed wasn’t temporary, the cryptocurrency market, led by Bitcoin began a downward spiral.
There is also the negative effect of the recent advertising bans imposed by companies including Facebook and Alphabet’s Google. Such ban sends a negative vibe to the public on cryptocurrencies and ICO projects.
What is clear is that the recent stock market performance has almost nothing to do with the performance of Bitcoin and cryptocurrencies at large. For the most part, the stock market struggles stem from investor panic over things that might be. As Julianne Niemann of research firm Smith Moore said "The market has a psychology right now of, 'when in doubt, get out. We'll figure out later what happened.' "
If the downward trend of stocks continues especially because of the political uncertainties around the Trump administration, we might see investors look in the direction of Bitcoin to protect their wealth given that the government does not control it. This may inherently increase the demand for the number one cryptocurrency. Researchers at the Commonwealth Scientific and Industrial Research Organization found that political uncertainties in recent years, such as the economic crisis in Greece, uncertainties surrounding Brexit and the election of Donald Trump as U.S. president have brought about an increased demand for Bitcoin, pushing up prices in the end.