SOUTH BEND, Ind. — Bitcoin, the world’s largest cryptocurrency, fell last week to roughly half of its record high value. It hit more than $126,000 in October, according to the crypto trading platform Coinbase.
After the election of President Trump, Bitcoin prices went up, in part due to expectations from investors of a crypto-friendly administration.
Those gains have been wiped out in the past several months.
Vivian Fang, Ph.D., is a Professor of Finance at the Indiana University Kelley School of Business.
She explains how the current administration and its crypto-friendly approach have impacted the market.
“You can see that after Trump took office; the crypto market had a remarkable run-up. Bitcoin price climbed from a little bit over 70,000 all the way to $120,000. So I think the friendly attitude this administration had towards crypto definitely helped. But at the same time, I think the market is still volatile. Like I said, right, the interest rate, even some of the change at the Fed, will affect the sentiment in the market and how traders perceive risky assets,” said Fang.
Fang says Bitcoin has been around for more than 15 years and was the first cryptocurrency on the market. It remains the largest, accounting for more than half of the current crypto market in terms of market size and value.
Fang says it was introduced around the time of the 2008 financial crisis, when people had little trust in traditional banking and crypto was to be a competing currency to centralized financial institutions.
Now, Fang says it’s become integrated into traditional finance.
“Before pandemic, I mean, before March 2020, the correlation between Bitcoin price and SPY is very low. We’re talking about around zero. But after the pandemic started, that correlation, the co-movement between Bitcoin price and just the whole stock market, especially the risky section like NASDAQ of the market, had increased so much to a point that, you know, we see 90 percent correlation,” said Fang. “So, you can see right now the traders are considering Bitcoin, or cryptocurrencies in general, as a risky asset. So, when the market sentiment is lower, when people, kind of try to — we call it a risk off event, right? When traders want to stay away from risky assets, then they may have a tendency to unload some of their holdings in Bitcoin or cryptocurrencies.”
Fang says Bitcoin is the leading indicator in the crypto market and says there are other forms of crypto tokens that serve different purposes, like Stablecoin or NFTs.
Fang says Bitcoin prices have mellowed out a lot in recent years compared to where it started and compared to other forms of cryptocurrency, or altcoins.
“Bitcoin is definitely the leading indicator in the crypto market. When Bitcoin goes up, right? You can see other cryptocurrencies go up as well. And when Bitcoin goes down, other types of cryptocurrency, except for Stablecoins, we really need, like significant volatility in the market for Stablecoin to lose its peg. But I would say that the volatility tends to be magnified in smaller cryptocurrencies, even though Bitcoin could lose, you know, $5-6,000 in a day, if you calculate the volatility or the standard deviation of the return, it is still very small compared to other cryptocurrencies that could go up and down significantly more,” said Fang.
Professor Fang says nobody can tell for sure why Bitcoin goes up or down any day.
She has been following the crypto market for more than 10 years and says nothing really surprises her.
Fang says if an asset of any kind goes up too much, a correction is inevitable and last week was a significant correction.
“Now, the whole market last week was very volatile. You know, even some of the software stocks, some of the chip stocks, we see a daily fluctuation of 10% or even 20%. So, yeah, Bitcoin was volatile. But if, if I have to compare Bitcoin with some of the stocks that experienced correction last week, it doesn’t really stand out. Bitcoin is just a very highly watched crypto asset,” said Fang.
Fang says she doesn’t believe that the crypto sector will ever go away.
