How Bitcoin’s Crash Could be Feeding into Stock-Market Selling Pressure
Investors are still scratching their heads over what caused a sudden and dramatic reversal around midday after a morning of solid gains, but there might be some clues in the latest bout of bitcoin selling.
The Dow was up as much as 700 points in Thursday’s session, as Nvidia earnings lifted the market, only to whipsaw in the other direction and end the day down 300 points.
Why the herky-jerky price action? One explanation could be that AI bubble fears have now grown to levels that overpower even impressive earnings from the most highly valued company in the world.
Another reason might be found in the faltering crypto market.
Bitcoin is experiencing its worst sell-off since 2022, with the price of the top token down by more than 30% from its recent highs. That could be causing liquidity concerns, driving investors to sell stocks to cover their leveraged long positions.
“We attribute some of today’s stock market selloff to the ongoing plunge in bitcoin’s price,” said Ed Yardeni, the founder of Yardeni Research, in a client note. “There has been a strong correlation between it and the price of TQQQ, an ETF that seeks to achieve daily investment results that correspond to three times (3x) the daily performance of the Nasdaq-100 Index (chart).”
He continued: “It’s possible that the rout in bitcoin is forcing some investors to sell stocks that they own.”
One specific reason investors may need liquidity is margin calls from their brokerages as bitcoin losses pile up, according to Steve Sosnick, chief strategist at Interactive Brokers. Crypto brokerages tend to offer higher levels of leverage than an investor could access for stocks.
“As a result, if that starts to break, it adds a lot of fragility to the system,” Sosnick said on CNBC on Thursday.
There’s also a possibility that algorithmic traders that use bitcoin as a barometer for risk sentiment dumped stocks during Thursday’s session as the crypto’s plunge triggered fresh sell signals.
“Right now, it’s being used as a proxy for speculative fever,” he said. “If I’m noticing it and you’re noticing it, algorithms are noticing it. And so money is being allocated on this, rationally or not.”
Salman Ahmed, Fidelity’s global head of macro strategy, echoed these sentiments on Bloomberg Television on Friday.
“I think that crypto is a general canary in the coal mine,” Ahmed said. “It’s been bleeding, bleeding, bleeding for a while.”
