Why interest rates, stocks and crypto are sometimes correlated

After learning more about the Federal Reserve’s hawkish intentions to raise interest rates this year in part to control inflation, the Nasdaq fell more than 3% on Wednesday and the S&P fell nearly 2%.

But here’s the thing: Cryptocurrencies are down, too. Bitcoin is down 5%. Ethereum is down about 7%. These are the same cryptocurrencies that we are told do not follow the normal rules for currencies and stocks.

But it kind of seems like they do.

For some people, cryptocurrencies are like gold – a place to store and protect your money.

“As a hedge against inflation,” said Christopher Vecchio, chief strategist at Daily Forex.

On Wednesday, we learned that the Fed was preparing to be very aggressive in fighting inflation.

“Well, with expectations of lower inflation metrics, if this is one of the reasons why people are investing in cryptocurrency, there will be no need for a long-term cryptocurrency,” Vecchio said.

In this way, the cryptocurrency was behaving like gold, and the price went down. Now, for some people, cryptocurrency is not about inflation; It’s really just a long-term gamble.

“Most value propositions are for things 30 years from now. That means the payoff is long into the future,” said James Engel, professor of finance at Georgetown University.

But when interest rates suddenly rise here and now, long-term bets look less attractive. In this way, the cryptocurrency behaves much like those high-flying tech stocks on Nasdaq. They also have big, long dreams ahead, and investors are a little tired of pie in the sky.

Speaking of shattered dreams, when the market crashes, it also means “less money for people to play with in the cryptocurrency market,” Engel said.

In fact, when things go wrong in the broader market, people will take money out of crypto to save themselves, especially when the markets are closed.

Stéphane Ouellette, CEO of FRNT Financial, said, “Only in our design,[a] A clear correlation between the accelerated sell-off and stock hours in North America.”

In this way, the cryptocurrency behaves much like an older investment – an amount of cash under the mattress for emergencies.