Investors often look to the stock market as an analog of the cryptocurrency market. So, in an attempt to understand the current crypto winter we’re in, it may make sense to dive into the bear market in stocks right now.
Although both markets are seeing significant selling pressure, the correlation between cryptos and equities isn’t perfect. The fact is, the cryptocurrency market is much more nascent, and there simply isn’t enough data to make strong comparisons.
Nonetheless, the previous crypto winter started in late 2017 and ended in 2020. Similarly, the stock market did not perform well during that period. Accordingly, while these two markets may seem highly correlated (and this correlation has been higher this year than in the past), perhaps it’s merely coincidence that we’re seeing pain across the board.
That said, most investors want to know when the crypto downturn might end. And in order to understand when that could happen, the search for catalysts that could signal an end to this pain is on. Here are three such signs investors may want to be on the lookout for as signals crypto winter could be thawing.
Historical Precedent
Understanding the gyrations of any market typically requires an understanding of past trends available in the historical data. For example, investors seeking to understand current bear market conditions are heavily reliant on past data. Such investors may reasonably expect that certain defensive stocks that have performed well in previous downturns are likely to do well this time around.
That’s great for stock investors. The 27 bear markets since 1928 are well-documented. On average, each has lasted for a period of 9.6 months. That would be a reasonable guess for this current bear market as well.
That said, there are issues with relying on historical data to determine the potential length of this current crypto winter. The issue is relatively simple — there’s a relative lack of historical data for cryptocurrencies. Thus, making any sort of assertions as to the duration or depth of this market downturn is difficult.
One recent Forbes article suggested that this crypto winter could last until 2026. But that prognostication is based on the notion that the duration of previous crypto winters from 2012 to 2019 is predictive of the current situation. While the data is scant, this is what we have to work with.
Follow Tech Stocks
Despite a relative lack of data in the crypto sector, there happens to be a plethora of data to rely on when it comes to the stock market. Thus, for investors who believe the relatively high correlation we’ve seen between tech stocks and cryptos will continue, some parallels may be drawn that are worth considering.
That same aforementioned Forbes highlighted this correlation. In particular, the high correlation between Bitcoin (BTC-USD) and the tech sector is something that experts believe could provide some signals as to when this crypto winter may end. In essence, the thesis is that when tech stocks look like they’re ready to turn the corner, cryptocurrencies may follow.
Here’s the problem. Knowing precisely when tech stocks are “turning the corner” or bottoming is difficult to predict. Many believe the market has bottomed, while some pundits speculate that if this tech bubble bursts, it could be worse than the dot-com bubble of the late 1990s.
During that tech crash, the entire technology sector shed nearly 80% of its value. Additionally, this bear market took years to reach bottom. If the performance of the tech-heavy Nasdaq index is predictive, then this crypto winter may have a long way to go yet. That’s because the Nasdaq is only down roughly 27% in the current bear market.
Follow the Federal Reserve
Given the high correlation we’re seeing between tech stocks and cryptocurrencies such as Bitcoin, it’s important to think about what’s causing this correlation. Many experts believe that interest rates may be the link between the two.
Indeed, rising interest rates preceded, and many believe caused, previous stock market crashes. That’s because the cheap liquidity that propped up risk assets during periods preceding the dot-com bust and the Great Recession provided the tide that lifted all boats. However, when capital became more expensive, as it is now, investors sought out more defensive assets and alternatives such as bonds.
Accordingly, many are skeptical about the ability of the crypto market to bounce back soon. It’s clear that the Federal Reserve will continue to be aggressive following August inflation data. Today, the Federal Reserve announced another 75 basis point (0.75%) rate hike to quash inflation. Thus, money is more expensive, and liquidity looking for higher-risk growth assets may becoming more scarce.
Should a Fed pivot take hold, perhaps tech stocks and cryptocurrencies alike could find a bottom. But until that happens, expectations are that the crypto winter could drag on for some time.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
