Typically, crypto prices are driven by obscure factors such as tweets from bitcoin enthusiast Elon Musk, whose electric vehicle company Tesla had bought large quantities of the tokens. Shifts in price in highly speculative cryptocurrencies rarely if ever impinge on regulated and established markets.
But that may be starting to change.
On Friday afternoon, cryptocurrencies fell sharply again after China's vice-premier Liu He restated Beijing's determination to curb cryptocurrency mining and trading. The news knocked 12 per cent off the value of bitcoin, 20 per cent from ethereum and 18 per cent from dogecoin. The sell-off appeared to bleed into the US stock market, where the tech-heavy Nasdaq dipped in the last hour of trading.
At Barclays, credit analyst Soren Willemann also noted that the turmoil in bitcoin had rumbled European corporate bonds. "Direct implications are hard to dream up, but to the extent that the crypto correction correlates with weakness in shares of modern tech companies (not least Tesla's bitcoin holdings), it matters to European credit, as it is hard for our markets to ignore [S&P 500] weakness," he said. "That said, we would be buyers on any crypto-induced dip."
With regulators around the world increasingly circling the cryptocurrencies market, mostly in an effort to bolster consumer protections, the question of bitcoin's relevance to wider markets has become more pressing among investors.
One theory is that if bitcoin prices were to nosedive, that could be a meaningful blow to household finances for retail investors, chipping away at the narrative that the buoyant consumer can continue to prop up stock markets.
In addition, some funds and family offices have put money into cryptocurrencies, triggering a surge of interest among investment banks seeking to facilitate demand. On the margins, a large crypto drop could also dent the market's appetite for risky bets.
The counterpoint is that a boom in crypto trading has coincided with a drop in volumes on stock trading platforms favoured by have-a-go day traders. Any large and sustained crypto fall could therefore prove to be a trigger for a pick-up in riskier parts of the stock market if those retail investors were to return to stocks.
- Financial Times