Bitcoin’s (Worrying) Potential Influence Over the Stock Market
According to the head of equity strategy for Wells Fargo Securities, a bitcoin crash may hurt the stock market. Christopher Harvey told CNBC that he is observing cryptocurrency markets to remain aware of notable price fluctuations and react accordingly.
Lack of Real-World Value
“There is a significant amount of froth in the cryptomarkets. We do think that if that froth comes out, it will start to spill over,” said Harvey. His statement acknowledges the mostly unprecedented value spikes in the new yet booming digital currency industry, which has turned the traditional idea of money on its head.
Harvey is not the first financial expert to publicly share this fear, with Bob Doll of Nuveen Asset Management iterating the same sentiments on December 14, 2017:
“A little bit of inflation is good for the revenue line. When it becomes evident that the Fed has to sit on it by becoming punitive and raising rates faster than the curve suggests, that’s when we worry.”
Bitcoin’s value is overly reliant on demand and supply, with increasingly little attachment to real-world value. Its volatility combined with its sharp upward trend has led many to invest, buy and then hold as opposed to using it as a digital currency.
Put simply, the same logic that dictates that a dollar not spent today is worth two tomorrow has caused a worldwide frenzy of people buying into bitcoin mainly for fear of missing out on potential “riches.”
Has Bitcoin Reached its Peak?
In reality, it is unclear whether bitcoin has had its boom already or will continue to grow exponentially. It is possible that a meeting between the real-world value of the cryptocurrency and its current value, are two entirely different things. This distinction would ultimately equate to a sudden, sharp decline and the “bursting of the bubble.”
Aside from the millions that would be lost by investors around the world, the effect may very well spill over to the stock market.
“What we’re worried about is froth coming out of that market,” said Harvey, “and that’s starting to affect equities. You’re seeing it a little bit, but just not to a large degree. And, it’s something to watch out for in 2018.”
Indeed, an example of this was just last week on 2017’s Christmas Eve, when bitcoin, ripple, and ether dropped in value. Bitcoin cash and litecoin were among them, as well as the majority of the leading cryptocurrencies currently available in the market.
Although there has been speculation that the high returns associated with cryptocurrency are attracting investors away from stocks, Laszlo Birinyi has the opposite belief, apparently having witnessed cryptocurrency inviting new investors into other investment methods; most notably the stock market.
“Bitcoin has woken up a lot of people,” said Birinyi, founder of Birinyi Associates, Inc. “All of a sudden more and more people are aware there’s a market going on, the stock market and there’s a way to make money.”
His statement may better explain the power cryptocurrency has over the stock market. A drop in bitcoin could lead to large-scale withdrawals, with the ripple effect hitting the stock market as investors seek to minimize losses by withdrawing their funds from there as well.