October has been a bad month. The broad stock market lost all of its gains for the year while the cryptocurrency market consolidated sideways.
After this year’s cryptocurrency bear market, crypto investors can be forgiven if they don’t have much sympathy for stock investors.
What’s interesting, however, is how well the crypto market has held up in the face of a mini-crash in the stock market.
Stock market gyrations can be instructive for crypto investors, so I’ll discuss the importance of sentiment in any financial market.
The S&P 500 index lost about 10% in October. (Bitcoin can rally or decline that much in a day and not be an extraordinary event).
A 10% correction in the stock market, especially in the last 10 years, is a big deal and it has investors worried.
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The relative strength in cryptocurrencies could be a bullish positive sentiment indicator in a month that has seen a risk-off response by stock investors.
The crypto market did not sell off strongly with the stock market, which could mean most of the selling in the crypto market already has occurred.
Flight to safety
Waning selling momentum in the crypto market doesn’t guarantee a bottom is in place, but it does indicate any new lows from here will likely be the completion of the decline.
It’s even possible that further selling in the stock market could produce a “flight to safety” into Bitcoin and other altcoins.
There are a variety of theories regarding how the crypto market will respond to the stock market. Some suggest investor sentiment will affect both markets the same way — fear and greed are the two primary emotions in investors.
When fear becomes stronger than greed it can spark selling in all asset classes.
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The other side of the argument is that these markets are separate, unrelated entities. Generally speaking, investors in cryptocurrencies are looking for an alternative to the stock market, gold, real estate, artwork, etc.
When those markets decline, investors may switch their money into cash or cryptocurrencies.
In my opinion, the crypto market will not trade in sync with the stock market. And I think this year is proving my belief is the more correct of the two.
The stock market rallied this year while the crypto market dropped into a bear market. Yet the October decline in the stock market was met by a neutral, though weak, crypto market.