The Deep Dive – Why is Bitcoin Weighing on Tech Stocks

European stocks are trading with a cautious tone this morning, after Thursday’s sell off across equity markets and in precious metals. Gold and silver are recovering on Friday morning, but silver is nursing a hefty loss this week and is down 13% in the last 5 days. Bitcoin is higher after reversing all its post-Trump gains, and is back above $65,000 on Friday morning, which is having an ameliorating effect on US stocks market futures. Futures tracking the S&P 500 are pointing to a slightly higher pen later today as sentiment tries to recover.

There was no single driver that triggered the recent sell offs across tech stocks and commodities, instead it appears to be nervousness around stretched valuations. The sell off in bitcoin is also interesting, as bitcoin and the Nasdaq tend to move together, and their positive correlation  is 40%. This is a moderate positive correlation, however, the correlation between bitcoin and Bloomberg’s basket of AI stocks have a closer positive relationship, at 62%.

How bitcoin can move tech stocks

This suggests that when bitcoin moves, it has an impact on AI stocks. The reason for this is liquidity. In recent years, liquidity has flowed across digital assets and advanced tech stocks at the same time. This means that both asset classes share a tight financial link, which is impacted by shifts in liquidity patterns.  So, when bitcoin gained strength, this flowed into AI stocks, and when the price of bitcoin falls, this downside pressure can weigh on tech stocks.

Innovation cycle in financial markets comes to a stop

Rapid growth in ETF flows has likely contributed to this link. However, it also tells us something about the investment cycle. When bitcoin and AI stocks rise in unison it is a sign that the innovation cycle is in full swing. Investors are focusing on the future: AI will shape the future of computing and how we do business, bitcoin represents the future of decentralized finance and global payments. Recent nervousness in markets is down to fears about the future of bitcoin, and concerns about a bubble in AI. The innovation cycle has come to an end, the question is, have investors lost all faith, or will they look to the future once again?

Bitcoin may have experienced a sharper sell off since October in comparison to tech stocks, but they are now falling in lockstep. The delay in tech stocks’ decline can be put down to a larger community of stock traders compared to bitcoin, and stock markets’ fundamentals propping them up, something which bitcoin  does not have.

AI and Bitcoin set for a respite

Bitcoin’s slump below $65,000 on Thursday attracted some buying interest, and it is higher by $2000 so far today. This could suggest that tech names that have been sold sharply this week, including App Lovin, Paypal, Robinhood and Coinbase could be ripe for a recovery at the end of this week, and this could lift stock indices too.

One stock that may remain under pressure later today is Amazon, after it reported its results last night. The market may take fright at the $200bn capex pledge included in the results, after Alphabet’s shares were sold off on Thursday also due to capex concerns.

Bonds are king in the current environment

As liquidity flows out of bitcoin and tech stocks, bonds are the haven of choice, and European sovereigns are higher again today. Global sovereign bonds are higher this week as stocks have fallen, and yields are lower, particularly at the short end.

Al but two sectors of the S&P 500 fell on Thursday, even non-tech sectors. Likewise, the equal-weighted S&P 500 is lower, even though the sell off in non-tech sectors of the market has been mild so far. This suggests that steep declines in tech and bitcoin could trigger forced selling elsewhere.

Earnings fail to boost market sentiment

There will be no payrolls report today, because of the temporary shutdown of the US Federal government. This report will now be released on Wednesday 11^th February. This means that in the short term, there is little fundamental news to displace fears about an AI bubble. Added to this, momentum has drained from  the market right now, and there are few factors propping up stocks. Earnings and revisions are not having a positive impact on markets which suggests that the drivers that helped global equity markets reach record highs in recent years and months have lost their influence.

This is a challenging time for investors. When stocks fall because of valuation and bubble fears, this can lead to a long grind lower for stocks. February is not panning out well for stock market bulls so far, we shall have to see if  bitcoin’s recovery above $65,000 is a sign that a deeper recovery is on the cards.

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