Crypto and Bonds: A Not-So-Hush Affair in the Finance Love Triangle

Maria Irene

When you’re in the world of investment, you’ve got to keep an eye on different assets. Not just stocks and cryptocurrencies but also bonds, those seemingly stodgy pillars of the financial world. As it turns out, the ripple effects of changes in bond yields can set off waves in the cryptocurrency market, too. That’s right, when Uncle Sam coughs up a change in bond yields, Bitcoin may well get the flu.

Let’s begin with the basics: rising bond yields often translate to dropping cryptocurrency prices. Why does this happen? Simple, really. When bond yields go up, the promise of a higher return on those government bonds makes them more attractive to investors. Suddenly, the siren call of bonds becomes irresistible, luring people away from riskier investments like cryptocurrencies. This switch in investor sentiment doesn’t just affect the fate of one Bitcoin; it creates a spillover effect that causes a slump in crypto prices across the board.

Now, if you think that bonds only have this mystical power over cryptocurrencies, you’d be mistaken. The stock market also feels the pinch when bond yields rise. Both these markets—stocks and crypto—are what you’d call risk-on assets. They tend to be more volatile but also offer higher returns. When interest rates on bonds rise, the stock market, much like the crypto market, also sees a decline.

But wait, there’s more! While this shift in investment dynamics occurs, another narrative unfolds—the concern of the investor. Investors start getting jittery about interest rates and monetary policy. A whiff of panic drifts over both traditional and digital markets. Cryptocurrencies like Bitcoin bear the brunt of this as much as any other financial asset.

So, what happens next? Ah, the anticipation! Financial markets, cryptocurrencies included, are like that kid who can’t sleep the night before their birthday, always wondering what’s in the wrapped box. In the case of financial markets, the “wrapped box” is the US Federal Reserve and its plans for future interest rate hikes. The crypto market reacts to even the smallest movement in bond yields, clearly showing that it’s not immune to changes in interest rates.

Now, let’s pepper this with a dash of data. For instance, at one point, the 90-day correlation coefficient between Bitcoin and the yield on the 10-year U.S. inflation-indexed security almost hit a record of -0.95. If numbers make your head spin, just know this: a negative correlation coefficient means that when one goes up, the other goes down. So, a rise in bond yields typically brings a drop in Bitcoin prices.

But that’s not all; there’s evidence of this happening in real-time as well. On a specific trading day, Bitcoin plunged below $27,400 just as U.S. bond yields rose. And it’s not just Bitcoin that’s affected. When bond yields go up, traditional markets take a hit too. For example, on one occasion, a rise in bond yields caused the Nasdaq to drop more than 3%, and the S&P 500 nearly 2%, while cryptocurrencies also took a dive.

In summary, you can’t just put on your crypto blinders and ignore what’s happening with bond yields. Both are part of a larger, intricate financial web where a nudge on one strand reverberates across the whole system. So, the next time you’re wondering why your Bitcoin investment is losing its spark, look no further than the yield on government bonds. It might just be the relationship you never knew existed, but one that’s affecting your investment portfolio in more ways than you can imagine.


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Maria Irene
Maria Irene
Maria Irene is a multi-faceted journalist with a focus on various domains including Cryptocurrency, NFTs, Real Estate, Energy, and Macroeconomics. With over a year of experience, she has produced an array of video content, news stories, and in-depth analyses. Her journalistic endeavours also involve a detailed exploration of the Australia-India partnership, pinpointing avenues for mutual collaboration. In addition to her work in journalism, Maria crafts easily digestible financial content for a specialised platform, demystifying complex economic theories for the layperson. She holds a strong belief that journalism should go beyond mere reporting; it should instigate meaningful discussions and effect change by spotlighting vital global issues. Committed to enriching public discourse, Maria aims to keep her audience not just well-informed, but also actively engaged across various platforms, encouraging them to partake in crucial global conversations.


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