WEBVTT - Why Bitcoin Trades Like A Stock 0:00:02.040 --> 0:00:05.680 I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News, 0:00:06.160 --> 0:00:09.680 and this is Bloomberg Crypto, a daily Bloomberg I heard podcast. 0:00:10.080 --> 0:00:18.680 It's Tuesday June. One of the features that early investors 0:00:18.720 --> 0:00:21.960 in crypto would talk about a lot is something called correlation, 0:00:22.600 --> 0:00:26.320 or specifically the lack of it. Correlation is a concept 0:00:26.360 --> 0:00:29.960 that refers to the relationship between different financial assets. You 0:00:30.000 --> 0:00:32.240 can think about this as if the gold price goes 0:00:32.320 --> 0:00:34.960 up and the price of oil also goes up, you 0:00:35.040 --> 0:00:38.360 might say that those prices are positively correlated. But if 0:00:38.360 --> 0:00:41.640 you're an investor looking to diversify your portfolio, you don't 0:00:41.680 --> 0:00:45.120 want everything going in one particular direction, And for a 0:00:45.200 --> 0:00:47.920 while it looked like crypto assets might fit the bill. 0:00:48.800 --> 0:00:51.720 Over the past year, as inflation rates have begun to rise, 0:00:52.120 --> 0:00:54.440 not just in the US but around the world, the 0:00:54.520 --> 0:00:56.760 price of crypto has fallen in line with the price 0:00:56.800 --> 0:01:00.680 of stocks. What does that mean for crypto supposed independence 0:01:00.680 --> 0:01:04.440 from other markets? Bloomberg reports of Aldana Hadrick joins me 0:01:04.480 --> 0:01:12.120 for more. Holdanna, thank you so much for joining us today. 0:01:12.120 --> 0:01:14.319 Thank you for having me. You are one of the 0:01:14.319 --> 0:01:17.840 folks at Boomberg who writes about pretty much everything in markets. 0:01:17.880 --> 0:01:21.319 I feel, yeah, just about. It's just about and in 0:01:21.400 --> 0:01:24.479 that extremely broad and interesting remit that you have. One 0:01:24.520 --> 0:01:27.280 of the places you've been reporting on has been what's 0:01:27.319 --> 0:01:30.160 happening with crypto as it relates to what's happening with stocks. 0:01:30.160 --> 0:01:32.120 Can you talk a little bit more about that. Yeah, 0:01:32.160 --> 0:01:34.040 I love looking at this because I love looking at 0:01:34.040 --> 0:01:36.199 the stock market, which I cover on a daily basis, 0:01:36.240 --> 0:01:39.520 and then also crypto, which is just its own little animal. 0:01:39.600 --> 0:01:44.039 But basically, what's been happening this year, broadly speaking this 0:01:44.160 --> 0:01:47.920 year is that we have really strong correlations between stocks, 0:01:48.200 --> 0:01:52.200 US stocks and cryptocurrencies. And when I am saying cryptocurrencies, 0:01:52.240 --> 0:01:54.040 I really mean bitcoin, because a lot of people are 0:01:54.040 --> 0:01:57.240 just looking at bitcoin basically, And so what you're seeing 0:01:57.520 --> 0:02:00.600 is that on a day when stocks are up, you're 0:02:00.720 --> 0:02:04.320 very likely to also see bitcoin going higher. When stocks 0:02:04.360 --> 0:02:08.680 are down, bitcoin also very very likely is going down. 0:02:08.720 --> 0:02:12.240 So we have this really strong correlation. The correlation is 0:02:12.560 --> 0:02:17.200 particularly strong between bitcoin and tech stocks, and that's because 0:02:17.360 --> 0:02:20.919 a lot of strategists and analysts, when they're looking at 0:02:20.919 --> 0:02:23.920 these different asset classes, what they'll say is that both 0:02:24.040 --> 0:02:26.600 are sort of risk here. So give a lot of 0:02:26.639 --> 0:02:30.720 tech companies that are high growth companies. High growth and 0:02:30.800 --> 0:02:36.720 high growths means aren't necessarily super profitable fast exactly, they're expanding, 0:02:36.800 --> 0:02:38.640 you know, they're spending a lot of money. The cash 0:02:38.680 --> 0:02:41.720 burn is really high, but profits maybe are out in 0:02:41.760 --> 0:02:45.440 the future. Everybody knows that crypto is really really volatile, 0:02:45.480 --> 0:02:48.000 and so therefore you you sort of just have both 0:02:48.080 --> 0:02:51.680 falling into the same category. And so these correlations have 0:02:51.760 --> 0:02:56.600 been really really strong in two because we've had this 0:02:57.240 --> 0:03:00.360 you know, different Federal Reserve than what we've had over 0:03:00.400 --> 0:03:02.880 the last two years, where you have the Federal Reserve 0:03:03.280 --> 0:03:06.480 and you know, central banks around the world raising interest 0:03:06.600 --> 0:03:12.720 rates to combat persistently hotter than expected inflation. You're seeing 0:03:12.760 --> 0:03:15.720 these hotter than expected inflation prints. And so that's just 0:03:15.800 --> 0:03:20.799 not an environment that is very it's not comfortable for 0:03:20.800 --> 0:03:23.400 for crypto and for tech stocks. Well, let's talk about 0:03:23.440 --> 0:03:27.120 why that is right. So when folks say, oh, high 0:03:27.160 --> 0:03:29.679 interest rates are bad for text dogs or high interest 0:03:29.800 --> 0:03:32.120 rates are bad for stocks, like, what exactly is that 0:03:32.240 --> 0:03:36.040 like directionality there? Why is the one leading to the other. Well, 0:03:36.080 --> 0:03:38.200 if you have higher interest rates, it's just you know, 0:03:38.240 --> 0:03:41.680 the cost of doing business becomes a lot higher. That's 0:03:41.680 --> 0:03:45.240 exactly what the FED actually wants. They want to cool 0:03:45.360 --> 0:03:48.920 down growth because we just have been having inflation coming 0:03:48.920 --> 0:03:52.400 out hotter and hotter than expected for just a much 0:03:52.560 --> 0:03:56.559 longer period of time than so many people had been expecting. 0:03:56.640 --> 0:03:59.320 And so when you have this environment where it just 0:03:59.480 --> 0:04:04.320 costs more to be doing business basically anything, yes, basically 0:04:04.360 --> 0:04:08.000 anything for tech socks, it's you can sort of just 0:04:08.040 --> 0:04:10.000 look at it and think about, Okay, we have these 0:04:10.080 --> 0:04:13.520 high growth names like we just mentioned where out in 0:04:13.560 --> 0:04:16.279 the future, their their profits are just much further out 0:04:16.279 --> 0:04:19.440 in the future, and so in a higher inflation environment, 0:04:19.600 --> 0:04:22.840 those companies just don't fare as well. And then, just 0:04:22.920 --> 0:04:25.599 as we mentioned, you have this correlation with because it 0:04:25.720 --> 0:04:28.000 is risk here, just people think of it as being 0:04:28.320 --> 0:04:31.040 risk here, and so it's just it's think about an 0:04:31.040 --> 0:04:33.720 everyday investor, do they want to be owning something that's 0:04:33.760 --> 0:04:37.000 super risky that can sort of swing around based on 0:04:37.600 --> 0:04:42.280 macro trends and what then or our Nilon Musk tweet, 0:04:42.320 --> 0:04:45.200 the flow of money is just not what we saw 0:04:45.320 --> 0:04:47.920 over the last two years, where the FED was being 0:04:48.040 --> 0:04:51.520 much more accommodative in terms of, you know, trying to 0:04:51.560 --> 0:04:54.760 stabilize the economy during the pandemic, where they were buying 0:04:55.160 --> 0:04:58.360 treasuries and just putting a lot more money out into 0:04:58.360 --> 0:05:01.599 the system. Now they put a stop to that. They're 0:05:01.640 --> 0:05:05.880 raising interest rates. The labor market is extremely tight and 0:05:05.960 --> 0:05:10.599 inflation is much too high against this backdrop, today, the 0:05:10.600 --> 0:05:13.760 Federal Open Market Committee raised its policy interest rate by 0:05:13.880 --> 0:05:18.039 three quarters of a percentage point and anticipates that ongoing 0:05:18.120 --> 0:05:21.720 increases in that rate will be appropriate. Here's the thing, though, 0:05:21.760 --> 0:05:25.760 This correlation persisted or existed before a higher inflationary in 0:05:25.760 --> 0:05:29.120 a higher interest rates environment, and that was despite the 0:05:29.120 --> 0:05:33.279 assertions of various folks in crypto, especially bitcoin, as you mentioned, 0:05:33.279 --> 0:05:36.000 who would always say, no, no, the whole point of 0:05:36.040 --> 0:05:39.520 bitcoin is to not be like anything else that's happening 0:05:39.560 --> 0:05:42.839 in the market. Why do you think even prior to 0:05:42.920 --> 0:05:45.479 this environment that you're describing, where like all risk assets 0:05:45.560 --> 0:05:49.560 moving in one direction, why was that not holding true? 0:05:49.640 --> 0:05:51.760 Why was bitcoin not behaving in the way that people 0:05:51.800 --> 0:05:55.760 were expecting. I love these arguments, I love hearing them. 0:05:55.800 --> 0:05:58.360 There's so many, and they tend to sort of change, 0:05:58.360 --> 0:06:01.880 like the flavor changes, depending on what's happening. So maybe 0:06:01.960 --> 0:06:04.160 you know, like three or four years ago, you were 0:06:04.240 --> 0:06:06.960 hearing a lot of people saying that you should own 0:06:07.080 --> 0:06:11.200 cryptocurrencies because you know, for bitcoin, the supply is limited. 0:06:11.600 --> 0:06:14.440 So the idea is because the supply is limited, that 0:06:14.560 --> 0:06:17.520 it will act as a very good inflation hedge. Three 0:06:17.560 --> 0:06:20.080 or four years ago, we had inflation in the US 0:06:20.160 --> 0:06:23.200 running it around two percent. Right now, obviously that's very, 0:06:23.279 --> 0:06:26.120 very different. So really what should have happened had that 0:06:26.279 --> 0:06:29.120 hand out is that bitcoin would be performing a lot 0:06:29.160 --> 0:06:33.839 better during a higher inflation environment. These are just theories, 0:06:34.320 --> 0:06:38.840 you know, their arguments for for ornaments, the arguments. Yes, 0:06:39.480 --> 0:06:42.240 I mean, you have a lot of scholars who just 0:06:42.279 --> 0:06:44.960 look at this sort of on a longer trend. I know, 0:06:45.040 --> 0:06:47.440 I've I've talked to some professors and scholars who have 0:06:47.520 --> 0:06:50.440 looked at gold, for instance, where you just have a 0:06:50.560 --> 0:06:55.039 much longer history to study, and they had been warning 0:06:55.200 --> 0:06:58.520 all along, like, you know, maybe this really isn't the case, 0:06:58.600 --> 0:07:02.800 maybe bitcoin is not digital gold exactly, and you know, 0:07:03.040 --> 0:07:07.000 wait to see how things pan out, especially wait to 0:07:07.000 --> 0:07:10.239 see what happens during crashes. And so now we really 0:07:10.280 --> 0:07:13.120 do have it not holding up as well, and at 0:07:13.160 --> 0:07:16.520 the same time we have really high inflation, forty year 0:07:16.760 --> 0:07:19.119 high inflation in the u S at least, and there 0:07:19.120 --> 0:07:23.480 are other countries where like that's cute. Yeah, we love that. 0:07:25.200 --> 0:07:36.720 Thank you, Danna. We'll be right back. What about the 0:07:36.800 --> 0:07:42.760 idea that the institutionalization of crypto, which means like more traditional, 0:07:42.880 --> 0:07:46.679 bigger investors moving in, contributes to that correlation with stocks. 0:07:46.680 --> 0:07:49.160 How does that work in practice? This is a huge 0:07:49.360 --> 0:07:51.480 component of this. This is a really big factor, I 0:07:51.520 --> 0:07:55.600 think because over the last two years, I would say 0:07:55.720 --> 0:08:00.000 largely is where you had a lot of institutional investor 0:08:00.120 --> 0:08:03.440 just coming in becoming more interested in crypto. You know, 0:08:03.440 --> 0:08:06.000 maybe in two thousand eighteen, two nineteen, they were writing 0:08:06.000 --> 0:08:08.600 it off, they were saying, it's way too volatile. I 0:08:08.680 --> 0:08:11.560 don't want to be involved with this. Then you saw 0:08:11.600 --> 0:08:15.679 crypto taking off during the pandemic again because we had 0:08:16.040 --> 0:08:21.720 really loose accommodative monetary policy from low low interest rates. Yes, 0:08:22.120 --> 0:08:25.360 and they didn't want to miss out on what had 0:08:25.400 --> 0:08:29.840 been happening in one where crypto prices were just skyrocketing. 0:08:29.840 --> 0:08:32.840 It was the hot thing, it was really trendy. Everybody 0:08:32.880 --> 0:08:35.880 wanted to be in on it, whether retail or institutional investors. 0:08:36.040 --> 0:08:40.240 So having institutional investors be a big player in the 0:08:40.320 --> 0:08:44.199 space definitely contributes to this idea that the correlations with 0:08:44.240 --> 0:08:48.280 stocks and crypto are just much tighter or stronger in 0:08:48.360 --> 0:08:51.079 recent months than they had been. And it's the reason 0:08:51.160 --> 0:08:54.079 for that that institutional investors just like buy and sell 0:08:54.280 --> 0:08:56.760 way more and so they have that ability to move 0:08:56.800 --> 0:08:59.760 markets in one direction or another. Yeah, And it's really 0:09:00.040 --> 0:09:01.960 art actually to break down. Like I think people are 0:09:02.000 --> 0:09:05.200 obsessed with figuring out like what proportion of if you're 0:09:05.240 --> 0:09:08.240 looking at bitcoin for instance, like is it retail, what 0:09:08.320 --> 0:09:12.960 proportion is institutions? Uh, people love looking in at this 0:09:13.040 --> 0:09:17.040 and into this and having having huge arguments about it. 0:09:17.679 --> 0:09:23.200 You know, retail investors definitely got hurt during this sell off. 0:09:23.320 --> 0:09:26.200 So we had bitcoin hitting nearly sixty nine thou at 0:09:26.240 --> 0:09:32.560 the end of November, it's fallen something like forty Yeah, exactly. 0:09:32.640 --> 0:09:35.080 So definitely there's a lot of people who have lost 0:09:35.280 --> 0:09:38.120 a lot of money because they bought the high the 0:09:38.200 --> 0:09:40.599 high and now or if they're selling, they're selling a 0:09:40.720 --> 0:09:43.960 pretty decent blue One really interesting thing that to be 0:09:43.960 --> 0:09:46.400 looking at to figure out sort of like who is 0:09:46.640 --> 0:09:49.360 getting impacted is you can look at a number of 0:09:49.400 --> 0:09:52.240 different measures like this one is wonky, but like in 0:09:52.320 --> 0:09:55.800 the money measures where you're looking at the percentage of 0:09:56.200 --> 0:09:59.280 bitcoin addresses that are in the money, meaning you know, 0:09:59.280 --> 0:10:02.520 people who bought bitcoin of prices lower than current prices, 0:10:02.880 --> 0:10:06.160 and that has really been trending lower during the decline, 0:10:06.400 --> 0:10:09.800 meaning that people are just you know, sometimes maybe they 0:10:09.920 --> 0:10:12.720 they've just had enough and they sell their bitcoin or 0:10:12.720 --> 0:10:15.240 their crypto holdings, even at a loss, even at a loss. 0:10:15.360 --> 0:10:17.079 And so the reason you're able to do that is 0:10:17.120 --> 0:10:19.800 because of course all these transactions aren't public, or at 0:10:19.840 --> 0:10:22.720 least they are accessible if you know what you're looking for. Yeah, 0:10:22.800 --> 0:10:25.520 I mean that's what the whole blockchain is. You're supposed 0:10:25.559 --> 0:10:28.400 to be looking at this sort of public ledger. It's 0:10:28.400 --> 0:10:30.360 supposed to be very transparent and open where you can 0:10:30.360 --> 0:10:33.400 see how money is moving around. You talk to investors 0:10:33.640 --> 0:10:39.320 all daylong. Yes, by the way, what is the vibe um? 0:10:39.600 --> 0:10:42.199 So I talked to investors who you know, like stock 0:10:42.240 --> 0:10:49.120 market investors as well as crypto people. It's really within crypto. Again, 0:10:49.200 --> 0:10:51.439 going back to those arguments that you might be hearing, 0:10:51.480 --> 0:10:54.200 like it's an inflation hedge, things will pick up, things 0:10:54.200 --> 0:10:56.600 will be better. You a lot of times you'll hear 0:10:56.640 --> 0:11:01.160 some of those arguments where you know, maybe they're basing 0:11:01.200 --> 0:11:04.440 things a little bit more on sentiment than what's actually 0:11:04.480 --> 0:11:08.120 going on on the stock market side. Just about everybody 0:11:08.160 --> 0:11:11.319 I talked to when they're talking about crypto there, they 0:11:11.360 --> 0:11:15.840 always are tying things back to correlations and how bitcoin 0:11:15.920 --> 0:11:19.800 on its own isn't really independent, so to say, doesn't 0:11:19.880 --> 0:11:22.800 become a self fulfilling prophecy though, where you like, if 0:11:22.800 --> 0:11:24.560 you believe a thing is correlated, then you're like, well 0:11:24.559 --> 0:11:26.680 it's going to move in this direction. I might as well. 0:11:26.720 --> 0:11:28.480 I might as well, Yeah, I might as well a 0:11:28.480 --> 0:11:30.480 little bit. Yeah, that's a good point. The hive mind 0:11:30.480 --> 0:11:37.400 of markets. One of the stories that you wrote recently, 0:11:37.440 --> 0:11:39.320 because you know, you went one key, let's stay there. 0:11:39.600 --> 0:11:41.520 But one of the stories you were recently was this 0:11:41.559 --> 0:11:44.559 idea of like one of the most profitable trades in 0:11:44.600 --> 0:11:47.080 crypto was like buying and selling at a time when 0:11:47.080 --> 0:11:50.920 the stock market was actually not open because bitcoin trades seven. 0:11:51.040 --> 0:11:53.600 How did that work as a trade? This is so fun, 0:11:53.640 --> 0:11:57.440 This is super interesting. So we know crypto trades seven. 0:11:58.080 --> 0:12:01.160 It's trading every single day of the week, even on holidays. 0:12:01.520 --> 0:12:06.080 We have a trading internationally across hundreds of exchanges. The 0:12:06.080 --> 0:12:09.400 stock market is open Monday through Friday to four pm 0:12:09.480 --> 0:12:12.839 New York time. And so if you separate out those 0:12:12.920 --> 0:12:16.200 hours that time span and look at how bitcoin tends 0:12:16.280 --> 0:12:19.720 to perform during those hours versus the so called after 0:12:19.760 --> 0:12:24.280 hours when US markets are closed, you actually see that 0:12:24.320 --> 0:12:27.920 bitcoin doesn't fare as well when US markets are open, 0:12:28.160 --> 0:12:30.720 and then it holds steady. It's sometimes it does really 0:12:30.720 --> 0:12:33.320 well in these so called after hours. So this is 0:12:33.320 --> 0:12:37.160 the after hour effect is basically what it's been dubbed, 0:12:37.440 --> 0:12:40.839 where on weekends maybe you can see it rallying and 0:12:40.920 --> 0:12:44.120 having happy times, and then as soon as as soon 0:12:44.160 --> 0:12:47.240 as the US as soon as they wake up, it's 0:12:47.280 --> 0:12:51.040 like so, yeah, so this is really really interesting. There's 0:12:51.080 --> 0:12:54.440 a couple of different theories on what's going on. One, 0:12:54.600 --> 0:12:58.640 for instance, is that news continues to come in overnight, 0:12:58.840 --> 0:13:02.199 so traders have to keep pricing all of that stuff in. 0:13:02.679 --> 0:13:05.800 Another is if you, as stocks are closed and you're 0:13:05.880 --> 0:13:08.480 trader and you're still very interested in seeing what's going on, 0:13:08.679 --> 0:13:13.040 you're forced effect. Yeah, I mean you just yes, the 0:13:13.120 --> 0:13:18.880 board the board markets trader h yes, yes, uh, and 0:13:19.040 --> 0:13:23.360 uh we're very trendy, very trendy, uh, where they're forced 0:13:23.360 --> 0:13:27.720 to look at crypto because stocks are closed. Another is 0:13:27.840 --> 0:13:31.640 that maybe you just have a lot of international investors 0:13:31.640 --> 0:13:35.080 who are more willing to take on greater risks. You 0:13:35.120 --> 0:13:38.360 know a lot of international exchanges might let you use 0:13:38.400 --> 0:13:41.440 a lot more leverage, for instance, more you can just 0:13:41.600 --> 0:13:44.680 be a bit risk here with your with your bets. 0:13:45.200 --> 0:13:47.960 The fourth one, which I've heard from a couple of 0:13:47.960 --> 0:13:51.559 people now, is we just don't know. These are just theories. 0:13:51.960 --> 0:13:56.240 Nobody knows. I like to say it's aliens. So we 0:13:57.280 --> 0:14:01.120 again all all of the sual things that we resort to, 0:14:01.200 --> 0:14:03.920 and we have no idea why something is happening. Yeah, exactly. 0:14:04.000 --> 0:14:06.920 But again it just goes to show this correlation and 0:14:07.000 --> 0:14:11.400 just how bitcoin is moving during US hours, when US 0:14:11.440 --> 0:14:14.360 stock investors are up and about and during their thing. 0:14:14.640 --> 0:14:16.400 All right ya, you heard it here first, the board 0:14:16.440 --> 0:14:19.640 trader hypothesis of correlation. We were the first, We were 0:14:19.640 --> 0:14:22.240 the very first. Don't google it, just don't use anyone else's, 0:14:22.240 --> 0:14:26.160 don't ask anybody about it. Amazing. Thank you, such a pleasure, 0:14:26.200 --> 0:14:30.000 as always, thanks for having me. You can find more 0:14:30.120 --> 0:14:33.400 of Wildanna's reporting on the Bloomberg Terminal on Bloomberg dot 0:14:33.480 --> 0:14:37.160 com or find her on Twitter. She's at Vildanna Hadrick. 0:14:37.560 --> 0:14:42.280 That's h A j R. I C. On the next 0:14:42.320 --> 0:14:44.720 episode of Bloomberg Crypto, we'll take a look at where 0:14:44.720 --> 0:14:47.520 the UK stands when it comes to protecting crypto investors 0:14:47.840 --> 0:14:51.760 from fraud, scams and abuse. Bloomberg reports A will show 0:14:51.920 --> 0:14:54.720 who's based in London will join me for a conversation 0:14:54.880 --> 0:14:57.440 about where the UK is and where are you think 0:14:57.440 --> 0:15:00.480 it should be when it comes to keeping consumers safe 0:15:00.480 --> 0:15:06.320 from crypto risks. I'm Stacy Marie Ishmael and this is 0:15:06.320 --> 0:15:10.000 Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. 0:15:10.640 --> 0:15:12.680 For more shows from I Heart Radio, visit the I 0:15:12.760 --> 0:15:16.560 Heart Radio app, Apple Podcasts, or wherever you get your podcasts. 0:15:16.960 --> 0:15:19.840 Email your questions, comments, so suggestions for the show to 0:15:19.960 --> 0:15:22.640 Crypto at Bloomberg dot net and you'll find us on 0:15:22.640 --> 0:15:29.800 Twitter at Crypto. The supervising producer of this episode is 0:15:29.880 --> 0:15:34.280 Vicky very Galina. Associate producer is zan Ab Sudiki. Associate 0:15:34.320 --> 0:15:37.880 producer is Thy Butler. Desta wonder At is our engineer. 0:15:38.280 --> 0:15:42.080 Original music by Leo Sidron. Bloomberg's head of Podcasts is 0:15:42.080 --> 0:15:42.880 Francesca Levi.