Bitcoin and other crypto assets are rekindling with risk assets for the first time since the crash in May. The relationship between Bitcoin and equities is strengthening because a growing list of companies are acquiring digital assets or hold Bitcoin on balance sheets. Share prices have become positively correlated with the value of Bitcoin.
A latest example is PayPal, which now allows U.K. customers to buy, sell and hold Bitcoin. As a new service, PayPal is positioning on a trend that is engulfing the global financial system. Increasingly, companies will rapidly respond with products and services to meet digital needs. As such, correlation between PayPal’s stock price and Bitcoin is on the rise, and that shows the digital’s impact on companies’ financial statements and future earnings is increasing.
As a pair, Ethereum and equities have also been gaining momentum. Visa announced the purchase of a CryptoPunk to enter the non-fungible tokens (NFTs) business as an intersection of commerce and cultural aspects of crypto. To that effect, Facebook’s David Marcus, who is in charge of Novi, the digital wallet division, said in an interview with Bloomberg that the company is considering building products and services related to NFTs to address customers’ inquiries.
Since the selloff of crypto assets in May, Ethereum has had a bigger impact on the S&P than Bitcoin. Yet, the number of companies that are holding Bitcoin as an asset on their balance sheet is double that of companies involved with Ethereum. On days the S&P went down by more than 1%, Bitcoin lost 2.5%, whereas Ethereum declined by over 6%. Conversely, on days when the S&P rallied by 1 to 1.5%, Bitcoin and Ethereum went down by 10% at first, before recovering losses in days following.
There is, however, an important qualifier: A selloff in the S&P led the losses in Bitcoin and Ethereum, but the subsequent rally saw Ethereum in particular outpace equities and Bitcoin in percentage terms. A reason for this is Bitcoin and Ethereum are correlated with risk assets for separate economic reasons: crypto and NFTs versus blockchain technology.
The stock market is therefore showing a divide, whereas the “Bitcoin stocks” — Paypal, MicroStrategy, Coinbase, Galaxy Digital and others — are underperforming the “Ethereum stocks,” such as Grayscale Ethereum and Riot. The market cap weight for Bitcoin is larger because of Tesla, but Ethereum’s weight has been increasing because of the relative outperformance to Bitcoin since its London hard fork earlier this month.
The outperformance of the Grayscale Ethereum is notable because the stock market places greater economic value on blockchain technology than on crypto that can be used as a means of payment, likely because of the pending central bank digital currencies.
That said, the influence of Bitcoin on equities may wane somewhat because in the recent negotiations in the House on infrastructure and budget resolution, Democratic members blocked Senate attempts to scale back digital currency tax rules that require crypto exchanges to report transaction information to the IRS. To reverse this political challenge, lobbyists for the crypto industry must forge relationships in Washington to exclude the transaction disclosures in the budget reconciliation bill. That is a difficult task to accomplish and that may limit Bitcoin to trade meaningfully above the 50K barrier for the time being.
Ethereum, however, may continue to hold a grip on equities, irrespective of the proposed disclosure rules. The IRS is not targeting blockchain technology directly, and there is bipartisan agreement that innovation should not be diminished, including blockchain technology. The Ethereum-related stocks are therefore not overvalued against the threat of stricter IRS disclosures that may affect ability to generate high profits in digital assets and transactions.
A further rally of Ethereum could be expected, irrespective how the infrastructure bill amendments play out in the House. The volatility of crypto assets is not about the technical trading aspects or social media-driven sentiment about Bitcoin. Last year, institutional investors realized the pandemic structurally changed how consumers pay for products. Bitcoin, Ethereum and other crypto assets leaped in anticipation of major changes to the global payments system converting fully digital, including central bank digital currencies.
But the more noteworthy change is the relationship between stocks, bonds, commodities, currencies and crypto assets. Financial markets are signaling that Bitcoin and Ethereum are now an important part of valuations, which can affect expectations and spending decisions. While at times noisy, the volatility of crypto assets is likely to decline over time and that will become an incremental feature of daily changes in markets and economies.