[Good Morning Stock Market] Cryptocurrency Plunge... Impact on the Stock Market?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Park Jihwan] Attention is focused on how the recent sharp decline in cryptocurrency prices, including Bitcoin, will affect the stock market. Experts analyze that cryptocurrencies are ultra-high-risk products and belong to a separate domain from stocks, so the impact on stock prices will be minimal. While cryptocurrencies lack solid grounds to measure asset value, stocks can support their value through performance and other factors.

◇Sanghyun Park, Researcher at Hi Investment & Securities= The downward trend in cryptocurrency prices, including Bitcoin, continues. Bitcoin prices, which were around $63,000 in mid-April, have plunged about 50% to the $32,000 range. In particular, after rebounding to around $40,000 in June, cryptocurrency prices including Bitcoin fell about 18% within a week following this month's Federal Open Market Committee (FOMC) meeting. During the previous day's trading session, prices even fell below the psychological support level of $30,000.

The primary cause of the cryptocurrency plunge is concerns over liquidity reduction due to the Federal Reserve's early interest rate hike becoming visible. Although the cryptocurrency market grew rapidly alongside the technology innovation boom, the explosive price surge was mainly driven by liquidity expansion centered on the Federal Reserve. Conversely, concerns about liquidity reduction have dealt a direct blow to the cryptocurrency market.

Strong regulatory moves by governments worldwide have also acted as major negative factors for the cryptocurrency market. Central bank governors, including those of the Federal Reserve, have repeatedly pointed out the overheating or bubble risks in the cryptocurrency market. Furthermore, the Chinese government's strong crackdown on the cryptocurrency market, which can be considered the largest market for cryptocurrencies, has decisively shocked the market.

The impact of the cryptocurrency price plunge on other risky assets, especially tech stocks, appears limited. Since last year’s pandemic, the FANG index (Facebook, Apple, Netflix, Google), representing tech stocks, and Bitcoin prices maintained a similar trend, showing a high correlation. However, this trend has sharply weakened in the second quarter, with a notable divergence between the FANG index and Bitcoin prices.

Both tech stocks and cryptocurrencies face liquidity reduction risks represented by tapering, but market reactions differ. Cryptocurrencies lack solid grounds to measure asset value, whereas tech stocks are supported by performance and other fundamentals. In other words, while both rose together last year on expectations and liquidity, tech stocks are backed by fundamentals such as earnings, whereas cryptocurrency prices are vulnerable to liquidity reduction and regulation due to fading expectations.

◇Jiyoung Han, Researcher at Kiwoom Securities= Recently, the cryptocurrency market, including Bitcoin, has experienced consecutive crashes due to the Chinese government’s intensified crackdown on mining farms. However, since cryptocurrencies are ultra-high-risk assets, the impact on other risky assets such as stocks is expected to be limited.

On this day, the Korean stock market is expected to rebound, supported by eased concerns over the Federal Reserve’s early tightening cycle and expectations for the second-quarter earnings season driven by strong exports in June. Among these, attention should be paid to whether cyclical stocks such as materials and industrials, which underwent price corrections after June, will rebound.

Also, considering the expected decline in the won/dollar exchange rate due to the easing of the dollar’s strength, foreign investors who have recently traded sensitively to exchange rates are expected to have a favorable effect on the stock market.