Can Bitcoin’s recent dip in value be explained by repetitive mechanisms or measurable indicators? Is the drop in stock prices somehow connected to cryptocurrency’s market correction? Let’s consider the relationship between the cryptocurrency and legacy financial institutions.

Ups and downs

Bitcoin’s value has been declining steadily since December when it was at its all-time high of $20,000 USD. Crypto is susceptible to change and even somewhat chaotic, which causes anxiety among investors, but such a large loss of value must have some permanent cause.

The history of Bitcoin is rich in drastic declines in values. Just last December, when BTC’s price fell to the level of $12,500 USD the media proclaimed it was the “end of Bitcoin.”¬†First, in December 2017, Bitcoin’s price quickly climbed upwards. Secondly, today’s declines in value are much more spectacular than at the end of last year. They are also much more alarming.

In the world of cryptocurrency, this is nothing new, but they’re no less painful. There are plenty of potential causes, such as cryptocurrency exchange bans in China, or regulatory uncertainty in India. But the condition of the legacy finance is also important.

 Wall street dive

This morning brought little optimistic news for those following stock market indices. As Wall Street took a dive, MarketWatch claimed it was the end of the Donald Trump honeymoon. Today brought the biggest ever decline in Dow Jones index of 1175 points. As on the stock exchange, there are many potential reasons for the drop, such as an expected interest rate hike expected by the US Federal Reserve in 2018.

Whether you’re playing the stock market or just following the stocks over morning coffee, you’ll see a strange coincidence between the fall in Bitcoin’s value and the fall on Wall Street. Is it right? According to CCN, this is not necessarily the case. It is practically impossible to reach measurable data indicating the existence or absence of correlation. One of the few tools that can illustrate something is the Sifr Data and the z-score index that shows the relationship between currencies and stocks have to each other.

In short, if it is positive, there is a correlation between the increase or decrease in value. If it’s negative, there is no relationship. The correlation between z-score and S&P 500 is positive and maintained at 0.14 points, which means that it is almost unnoticeable and no conclusions can be drawn from it. However, not everything is lost, because when looking for a link, it is worth considering the VIX index of market volatility, also referred to as the fear index.

Fear index

The fear index is simply a description of investors’ expectations for the volatility of the S&P500 index, which includes 500 companies with the highest capitalization on the New York Stock Exchange and NASDAQ. Without going into detail and focusing on VIX’s impact on the cryptocurrency, it is enough to quote the CCN’s chart of the relationship between the index of fear and the BTC price. It clearly shows that the greater peace of mind for investors translates into a higher value of Bitcoin.

Wykres VIX a kurs BTC - dowbit polska

Addressing the problem?

Nowadays, when Wall Street is experiencing a major correction, the fear index is growing, market unrest is rising and Bitcoin’s value is declining. It is a complex process, which includes both the previously mentioned interest rate increases and a certain instability in the feelings of investors from the cryptocurrency world. Worse still, the lack of objective reasons for the described inheritances does not alleviate anxieties.

The crypto market combined with the traditional financial market is forming something like a snowball effect. It is going wrong, people start to get upset and even panic, which in consequence makes things even worse. Simply, more fear generates even greater fear, and this leads to hasty decisions that lead to a drop in BTC values.