Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,
Speaker 1: and this is Bloomberg Crypto, a daily Bloomberg I heard podcast.
Speaker 1: It's Tuesday June. One of the features that early investors
Speaker 1: in crypto would talk about a lot is something called correlation,
Speaker 1: or specifically the lack of it. Correlation is a concept
Speaker 1: that refers to the relationship between different financial assets. You
Speaker 1: can think about this as if the gold price goes
Speaker 1: up and the price of oil also goes up, you
Speaker 1: might say that those prices are positively correlated. But if
Speaker 1: you're an investor looking to diversify your portfolio, you don't
Speaker 1: want everything going in one particular direction, And for a
Speaker 1: while it looked like crypto assets might fit the bill.
Speaker 1: Over the past year, as inflation rates have begun to rise,
Speaker 1: not just in the US but around the world, the
Speaker 1: price of crypto has fallen in line with the price
Speaker 1: of stocks. What does that mean for crypto supposed independence
Speaker 1: from other markets? Bloomberg reports of Aldana Hadrick joins me
Speaker 1: for more. Holdanna, thank you so much for joining us today.
Speaker 1: Thank you for having me. You are one of the
Speaker 1: folks at Boomberg who writes about pretty much everything in markets.
Speaker 1: I feel, yeah, just about. It's just about and in
Speaker 1: that extremely broad and interesting remit that you have. One
Speaker 1: of the places you've been reporting on has been what's
Speaker 1: happening with crypto as it relates to what's happening with stocks.
Speaker 1: Can you talk a little bit more about that. Yeah,
Speaker 1: I love looking at this because I love looking at
Speaker 1: the stock market, which I cover on a daily basis,
Speaker 1: and then also crypto, which is just its own little animal.
Speaker 1: But basically, what's been happening this year, broadly speaking this
Speaker 1: year is that we have really strong correlations between stocks,
Speaker 1: US stocks and cryptocurrencies. And when I am saying cryptocurrencies,
Speaker 1: I really mean bitcoin, because a lot of people are
Speaker 1: just looking at bitcoin basically, And so what you're seeing
Speaker 1: is that on a day when stocks are up, you're
Speaker 1: very likely to also see bitcoin going higher. When stocks
Speaker 1: are down, bitcoin also very very likely is going down.
Speaker 1: So we have this really strong correlation. The correlation is
Speaker 1: particularly strong between bitcoin and tech stocks, and that's because
Speaker 1: a lot of strategists and analysts, when they're looking at
Speaker 1: these different asset classes, what they'll say is that both
Speaker 1: are sort of risk here. So give a lot of
Speaker 1: tech companies that are high growth companies. High growth and
Speaker 1: high growths means aren't necessarily super profitable fast exactly, they're expanding,
Speaker 1: you know, they're spending a lot of money. The cash
Speaker 1: burn is really high, but profits maybe are out in
Speaker 1: the future. Everybody knows that crypto is really really volatile,
Speaker 1: and so therefore you you sort of just have both
Speaker 1: falling into the same category. And so these correlations have
Speaker 1: been really really strong in two because we've had this
Speaker 1: you know, different Federal Reserve than what we've had over
Speaker 1: the last two years, where you have the Federal Reserve
Speaker 1: and you know, central banks around the world raising interest
Speaker 1: rates to combat persistently hotter than expected inflation. You're seeing
Speaker 1: these hotter than expected inflation prints. And so that's just
Speaker 1: not an environment that is very it's not comfortable for
Speaker 1: for crypto and for tech stocks. Well, let's talk about
Speaker 1: why that is right. So when folks say, oh, high
Speaker 1: interest rates are bad for text dogs or high interest
Speaker 1: rates are bad for stocks, like, what exactly is that
Speaker 1: like directionality there? Why is the one leading to the other. Well,
Speaker 1: if you have higher interest rates, it's just you know,
Speaker 1: the cost of doing business becomes a lot higher. That's
Speaker 1: exactly what the FED actually wants. They want to cool
Speaker 1: down growth because we just have been having inflation coming
Speaker 1: out hotter and hotter than expected for just a much
Speaker 1: longer period of time than so many people had been expecting.
Speaker 1: And so when you have this environment where it just
Speaker 1: costs more to be doing business basically anything, yes, basically
Speaker 1: anything for tech socks, it's you can sort of just
Speaker 1: look at it and think about, Okay, we have these
Speaker 1: high growth names like we just mentioned where out in
Speaker 1: the future, their their profits are just much further out
Speaker 1: in the future, and so in a higher inflation environment,
Speaker 1: those companies just don't fare as well. And then, just
Speaker 1: as we mentioned, you have this correlation with because it
Speaker 1: is risk here, just people think of it as being
Speaker 1: risk here, and so it's just it's think about an
Speaker 1: everyday investor, do they want to be owning something that's
Speaker 1: super risky that can sort of swing around based on
Speaker 1: macro trends and what then or our Nilon Musk tweet,
Speaker 1: the flow of money is just not what we saw
Speaker 1: over the last two years, where the FED was being
Speaker 1: much more accommodative in terms of, you know, trying to
Speaker 1: stabilize the economy during the pandemic, where they were buying
Speaker 1: treasuries and just putting a lot more money out into
Speaker 1: the system. Now they put a stop to that. They're
Speaker 1: raising interest rates. The labor market is extremely tight and
Speaker 1: inflation is much too high against this backdrop, today, the
Speaker 1: Federal Open Market Committee raised its policy interest rate by
Speaker 1: three quarters of a percentage point and anticipates that ongoing
Speaker 1: increases in that rate will be appropriate. Here's the thing, though,
Speaker 1: This correlation persisted or existed before a higher inflationary in
Speaker 1: a higher interest rates environment, and that was despite the
Speaker 1: assertions of various folks in crypto, especially bitcoin, as you mentioned,
Speaker 1: who would always say, no, no, the whole point of
Speaker 1: bitcoin is to not be like anything else that's happening
Speaker 1: in the market. Why do you think even prior to
Speaker 1: this environment that you're describing, where like all risk assets
Speaker 1: moving in one direction, why was that not holding true?
Speaker 1: Why was bitcoin not behaving in the way that people
Speaker 1: were expecting. I love these arguments, I love hearing them.
Speaker 1: There's so many, and they tend to sort of change,
Speaker 1: like the flavor changes, depending on what's happening. So maybe
Speaker 1: you know, like three or four years ago, you were
Speaker 1: hearing a lot of people saying that you should own
Speaker 1: cryptocurrencies because you know, for bitcoin, the supply is limited.
Speaker 1: So the idea is because the supply is limited, that
Speaker 1: it will act as a very good inflation hedge. Three
Speaker 1: or four years ago, we had inflation in the US
Speaker 1: running it around two percent. Right now, obviously that's very,
Speaker 1: very different. So really what should have happened had that
Speaker 1: hand out is that bitcoin would be performing a lot
Speaker 1: better during a higher inflation environment. These are just theories,
Speaker 1: you know, their arguments for for ornaments, the arguments. Yes,
Speaker 1: I mean, you have a lot of scholars who just
Speaker 1: look at this sort of on a longer trend. I know,
Speaker 1: I've I've talked to some professors and scholars who have
Speaker 1: looked at gold, for instance, where you just have a
Speaker 1: much longer history to study, and they had been warning
Speaker 1: all along, like, you know, maybe this really isn't the case,
Speaker 1: maybe bitcoin is not digital gold exactly, and you know,
Speaker 1: wait to see how things pan out, especially wait to
Speaker 1: see what happens during crashes. And so now we really
Speaker 1: do have it not holding up as well, and at
Speaker 1: the same time we have really high inflation, forty year
Speaker 1: high inflation in the u S at least, and there
Speaker 1: are other countries where like that's cute. Yeah, we love that.
Speaker 1: Thank you, Danna. We'll be right back. What about the
Speaker 1: idea that the institutionalization of crypto, which means like more traditional,
Speaker 1: bigger investors moving in, contributes to that correlation with stocks.
Speaker 1: How does that work in practice? This is a huge
Speaker 1: component of this. This is a really big factor, I
Speaker 1: think because over the last two years, I would say
Speaker 1: largely is where you had a lot of institutional investor
Speaker 1: just coming in becoming more interested in crypto. You know,
Speaker 1: maybe in two thousand eighteen, two nineteen, they were writing
Speaker 1: it off, they were saying, it's way too volatile. I
Speaker 1: don't want to be involved with this. Then you saw
Speaker 1: crypto taking off during the pandemic again because we had
Speaker 1: really loose accommodative monetary policy from low low interest rates. Yes,
Speaker 1: and they didn't want to miss out on what had
Speaker 1: been happening in one where crypto prices were just skyrocketing.
Speaker 1: It was the hot thing, it was really trendy. Everybody
Speaker 1: wanted to be in on it, whether retail or institutional investors.
Speaker 1: So having institutional investors be a big player in the
Speaker 1: space definitely contributes to this idea that the correlations with
Speaker 1: stocks and crypto are just much tighter or stronger in
Speaker 1: recent months than they had been. And it's the reason
Speaker 1: for that that institutional investors just like buy and sell
Speaker 1: way more and so they have that ability to move
Speaker 1: markets in one direction or another. Yeah, And it's really
Speaker 1: art actually to break down. Like I think people are
Speaker 1: obsessed with figuring out like what proportion of if you're
Speaker 1: looking at bitcoin for instance, like is it retail, what
Speaker 1: proportion is institutions? Uh, people love looking in at this
Speaker 1: and into this and having having huge arguments about it.
Speaker 1: You know, retail investors definitely got hurt during this sell off.
Speaker 1: So we had bitcoin hitting nearly sixty nine thou at
Speaker 1: the end of November, it's fallen something like forty Yeah, exactly.
Speaker 1: So definitely there's a lot of people who have lost
Speaker 1: a lot of money because they bought the high the
Speaker 1: high and now or if they're selling, they're selling a
Speaker 1: pretty decent blue One really interesting thing that to be
Speaker 1: looking at to figure out sort of like who is
Speaker 1: getting impacted is you can look at a number of
Speaker 1: different measures like this one is wonky, but like in
Speaker 1: the money measures where you're looking at the percentage of
Speaker 1: bitcoin addresses that are in the money, meaning you know,
Speaker 1: people who bought bitcoin of prices lower than current prices,
Speaker 1: and that has really been trending lower during the decline,
Speaker 1: meaning that people are just you know, sometimes maybe they
Speaker 1: they've just had enough and they sell their bitcoin or
Speaker 1: their crypto holdings, even at a loss, even at a loss.
Speaker 1: And so the reason you're able to do that is
Speaker 1: because of course all these transactions aren't public, or at
Speaker 1: least they are accessible if you know what you're looking for. Yeah,
Speaker 1: I mean that's what the whole blockchain is. You're supposed
Speaker 1: to be looking at this sort of public ledger. It's
Speaker 1: supposed to be very transparent and open where you can
Speaker 1: see how money is moving around. You talk to investors
Speaker 1: all daylong. Yes, by the way, what is the vibe um?
Speaker 1: So I talked to investors who you know, like stock
Speaker 1: market investors as well as crypto people. It's really within crypto. Again,
Speaker 1: going back to those arguments that you might be hearing,
Speaker 1: like it's an inflation hedge, things will pick up, things
Speaker 1: will be better. You a lot of times you'll hear
Speaker 1: some of those arguments where you know, maybe they're basing
Speaker 1: things a little bit more on sentiment than what's actually
Speaker 1: going on on the stock market side. Just about everybody
Speaker 1: I talked to when they're talking about crypto there, they
Speaker 1: always are tying things back to correlations and how bitcoin
Speaker 1: on its own isn't really independent, so to say, doesn't
Speaker 1: become a self fulfilling prophecy though, where you like, if
Speaker 1: you believe a thing is correlated, then you're like, well
Speaker 1: it's going to move in this direction. I might as well.
Speaker 1: I might as well, Yeah, I might as well a
Speaker 1: little bit. Yeah, that's a good point. The hive mind
Speaker 1: of markets. One of the stories that you wrote recently,
Speaker 1: because you know, you went one key, let's stay there.
Speaker 1: But one of the stories you were recently was this
Speaker 1: idea of like one of the most profitable trades in
Speaker 1: crypto was like buying and selling at a time when
Speaker 1: the stock market was actually not open because bitcoin trades seven.
Speaker 1: How did that work as a trade? This is so fun,
Speaker 1: This is super interesting. So we know crypto trades seven.
Speaker 1: It's trading every single day of the week, even on holidays.
Speaker 1: We have a trading internationally across hundreds of exchanges. The
Speaker 1: stock market is open Monday through Friday to four pm
Speaker 1: New York time. And so if you separate out those
Speaker 1: hours that time span and look at how bitcoin tends
Speaker 1: to perform during those hours versus the so called after
Speaker 1: hours when US markets are closed, you actually see that
Speaker 1: bitcoin doesn't fare as well when US markets are open,
Speaker 1: and then it holds steady. It's sometimes it does really
Speaker 1: well in these so called after hours. So this is
Speaker 1: the after hour effect is basically what it's been dubbed,
Speaker 1: where on weekends maybe you can see it rallying and
Speaker 1: having happy times, and then as soon as as soon
Speaker 1: as the US as soon as they wake up, it's
Speaker 1: like so, yeah, so this is really really interesting. There's
Speaker 1: a couple of different theories on what's going on. One,
Speaker 1: for instance, is that news continues to come in overnight,
Speaker 1: so traders have to keep pricing all of that stuff in.
Speaker 1: Another is if you, as stocks are closed and you're
Speaker 1: trader and you're still very interested in seeing what's going on,
Speaker 1: you're forced effect. Yeah, I mean you just yes, the
Speaker 1: board the board markets trader h yes, yes, uh, and
Speaker 1: uh we're very trendy, very trendy, uh, where they're forced
Speaker 1: to look at crypto because stocks are closed. Another is
Speaker 1: that maybe you just have a lot of international investors
Speaker 1: who are more willing to take on greater risks. You
Speaker 1: know a lot of international exchanges might let you use
Speaker 1: a lot more leverage, for instance, more you can just
Speaker 1: be a bit risk here with your with your bets.
Speaker 1: The fourth one, which I've heard from a couple of
Speaker 1: people now, is we just don't know. These are just theories.
Speaker 1: Nobody knows. I like to say it's aliens. So we
Speaker 1: again all all of the sual things that we resort to,
Speaker 1: and we have no idea why something is happening. Yeah, exactly.
Speaker 1: But again it just goes to show this correlation and
Speaker 1: just how bitcoin is moving during US hours, when US
Speaker 1: stock investors are up and about and during their thing.
Speaker 1: All right ya, you heard it here first, the board
Speaker 1: trader hypothesis of correlation. We were the first, We were
Speaker 1: the very first. Don't google it, just don't use anyone else's,
Speaker 1: don't ask anybody about it. Amazing. Thank you, such a pleasure,
Speaker 1: as always, thanks for having me. You can find more
Speaker 1: of Wildanna's reporting on the Bloomberg Terminal on Bloomberg dot
Speaker 1: com or find her on Twitter. She's at Vildanna Hadrick.
Speaker 1: That's h A j R. I C. On the next
Speaker 1: episode of Bloomberg Crypto, we'll take a look at where
Speaker 1: the UK stands when it comes to protecting crypto investors
Speaker 1: from fraud, scams and abuse. Bloomberg reports A will show
Speaker 1: who's based in London will join me for a conversation
Speaker 1: about where the UK is and where are you think
Speaker 1: it should be when it comes to keeping consumers safe
Speaker 1: from crypto risks. I'm Stacy Marie Ishmael and this is
Speaker 1: Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio.
Speaker 1: For more shows from I Heart Radio, visit the I
Speaker 1: Heart Radio app, Apple Podcasts, or wherever you get your podcasts.
Speaker 1: Email your questions, comments, so suggestions for the show to
Speaker 1: Crypto at Bloomberg dot net and you'll find us on
Speaker 1: Twitter at Crypto. The supervising producer of this episode is
Speaker 1: Vicky very Galina. Associate producer is zan Ab Sudiki. Associate
Speaker 1: producer is Thy Butler. Desta wonder At is our engineer.
Speaker 1: Original music by Leo Sidron. Bloomberg's head of Podcasts is
Speaker 1: Francesca Levi.