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According to Singapore’s DBS Group Holdings Ltd, the volatility of Bitcoin is fuelling the liquidity of US stock markets on these volatile trading days and it is no longer a separate asset class.
Reasons Why Volatility of Bitcoin Affecting U.S. Markets
DBS’s Chief Economist Taimur Baig and Macro Strategist Chang Wei Liang said in a research that finds the world’s largest token is no longer a peripheral asset class that S&P 500 contracts tend to exhibit larger swings when Bitcoin went up or down by 10% in an hour.
They examined four such trading days as examples of severe Bitcoin volatility — December 28, January 4, January 29, and May 19 — and compared the link to S&P 500 futures. According to the study, BTC and the S&P 500 are more favorably associated after a major crypto rise, with a correlation of 0.26 vs 0.19 under normal conditions.
Although there is still a weak correlation between the two assets, DBS observed that the variation of returns on S&P 500 futures was 42% higher than typical on those days as well.
“This implies that, for a limited time, wider equities sentiment may become increasingly linked with sentiment in Bitcoin markets,” they stated. “Given the recent Bitcoin woes, market participants would be advised to keep a watch on developments in this space.”
What Will the Bitcoin Price Do Next?
On Wednesday, BTC increased by 6% to trade near US$40,000. That is higher than last week’s low of around US$30,000, but far down than the mid-April record of about $65,000.
So far, mainstream assets have been able to withstand the wild swings. BTC has emerged as a major player in financial markets. “Bitcoin is no longer the speculative asset it once was,”
JPMorgan Chase & Co. analysts noted in a recent report that the cross-asset effect of the cryptocurrency decline has been “modest,” with fewer equities and credit drawdown compared to meme-stock ructions or this year’s bond selloff.
Nonetheless, other strategists are extremely cautious. This week, Ben Emons, managing director of global macro strategy at Medley Global Advisors LLC in New York, stated that bitcoin is “firming its grip on markets through volatility, liquidity, and correlation.”
The risk of “financial contagion if Bitcoin falls much below $20,000 cannot be discounted,” he continued.