Crypto Markets Are Almost Deaf to News From the Outside World
Traditional markets respond to the news all the time, so much so that news analytics companies have now become significant drivers (and distorters) of stock values and commodity prices. However, to what extent can the same be said for the crypto market? Is it influenced by world events, political developments, and the release of national economic indicators?
Well, no and yes. In the short term, crypto markets and the values of cryptocurrencies aren't responding to, say, the United States' announcement of trade tariffs, or the publication by a major nation of weak economic data. That said, the general growth of cryptocurrencies, particularly in 2017, was and is being facilitated by macroeconomic conditions, such as the prevalence of low interest rates and high availability of credit.
So in other words, while crypto can't be said to respond to every single piece of economic or political news, its growth as a whole could be said to be one giant, systemic response to the current state of the global economy.
Finding examples of how traditional stock markets react to world events isn't difficult. For instance, when the US President Donald Trump announced trade tariffs on aluminium and steel imports on March 1, the Dow Jones stock index fell by 400 points, while the S&P 500 and Nasdaq each declined by 1.3%.
Conversely, the British pound rose by 0.61% against the US dollar in late June, after the UK government revised its estimate of UK GDP growth upwards, from 0.1% in Q1 2018 to 0.2%.
Finding such correlations for cryptocurrencies, however, is much more difficult, even if the prices for bitcoin et al. have been observed to respond to news relating specifically to crypto (e.g. in response to exchange hacks).
Given that cryptocurrencies are decentralised and designed to run independently of specific nation states, national governments, and central banks, it's perhaps unsurprising that they show little if any synchronisation with news relating to the wider world (i.e. to said states, governments, and banks).
"No, the crypto markets do not generally react to any sort of geopolitical or breaking news outside of the world of crypto," Mati Greenspan, Senior Market Analyst at eToro, a social trading platform, told Cryptonews.com.
Despite this, Greenspan also explained that crypto's indifference to the wider world often works to its advantage.
"The correlations with other markets are historically very small, which is one of the main attractions for traditional investors," he said. "When you have an asset that is less-exposed to things like trade wars or monetary policy, it can have a stabilizing effect on your diversified investment portfolio."
Such comments are borne out by a glance at Bitcoin values. For example, Bitcoin rose by 4.34% on March 1, despite the unfortunate news for international trade, and despite the fact that stock markets had travelled in the opposite direction.
Its unresponsiveness to world events therefore makes it something of a safe haven, which would partly explain why it has been dubbed 'digital gold' in some quarters (gold also increased between March 1 and 2, although by about 1.4%).
'A ton of liquidity'
But even though cryptocurrencies tend not to fluctuate with political and economic news in the short term, their impressive growth can be construed as a longer term, organic response to the economic conditions prevailing in the world today.
"For example, 2017 was an excellent year for both stocks and cryptocurrencies with both markets seeing astronomical gains," Greenspan says. "This is largely explained by central bank operations which have pumped a ton of liquidity into the economy over the last decade, which was put to use by investors seeking larger returns and greater risk."
Because central banks have thrown extra money at the global economy (e.g. via quantitative easing), and because low interest rates have meant that traditional investments are less profitable than usual, investors have flocked to cryptocurrencies, which despite their volatility promise higher returns.
As such, the crypto market has responded to at least one particular world event: the financial crisis of 2008 and the precarious economic conditions that followed it, which despite showing some signs of recovery are still characterised by high levels of debt, low interest rates, and an excess of credit.
And it's possible that if the overall global economy doesn't significantly improve soon, crypto will only keep growing.