What Bitcoin’s Slump Says About Covid-19 and the U.S. Economy

The drop has wiped out about $650 billion in market value. The current value of all the Bitcoin’s mined is roughly $560 billion, down from more than $1.2 trillion.

That isn’t great for stock markets. Falling wealth impacts people’s ability to buy other things, such as stocks. Falling wealth also can generate fear and selling pressure from those looking to preserve newfound wealth.

Investors don’t typically like to see big drops in any asset class. But there is a couple of good reasons investors might actually cheer Bitcoin’s recent woes.

For starters, the correlation between Bitcoin and stocks is breaking down. At the start of 2021, the correlation between Bitcoin and the S&P 500 was relatively high, meaning when Bitcoin went up stocks were up and vice versa. Whether or not there was a reasonable fundamental linkage between the two is debatable, but the fact remained that investors could get a sense of investing sentiment by watching Bitcoin.

That doesn’t seem to be the case right now. Bitcoin has stopped moving with stocks. Again, why the correlation has broken down is debatable, but it means that Bitcoin’s stock doesn’t portend anything bad for stocks.

And Bitcoin’s drop is happening while Treasury bond yields fall. The yield on the U.S. 10-year treasury bond has gone from 1.49% to 1.19% over the past month. Lower yields mean lower interest rates. It should also make assets like gold and Bitcoin, which pay no interest, relatively more attractive.

If Bitcoin was rising as yields were falling it could be a sign that investors think low rates are here to stay. Low, or falling, rates also portend economic weakness. But Bitcoin isn’t rising. It’s falling right now, which may mean recent fears of another Covid-19 induced economic slowdown are overblown.

Gold, for comparison, is basically flat over the past month. It’s not rising either as rates drop.

So while early in the year a big drop in Bitcoin might have been problematic for stock investors. Right now, it looks like a positive.

Write to allen.rootdowjones.com