A new warning on US equities from Goldman Sachs could spell trouble for Bitcoin and the overall crypto markets.
In a note to investors, the financial giant says the five biggest stocks in the S&P 500 now hold a whopping 20% share of the benchmark’s overall market cap. Similar shifts were reliable indicators of major market downturns in 1990, 2008, 2011 and 2016.
“Sharp declines in market breadth in the past have often signaled large market drawdowns. Narrow breadth can last for extended periods, but past episodes have signaled below-average market returns and eventual momentum reversals.”
Another significant stock market plunge may not bode well for BTC. Recent analysis from Coinbase explains why Bitcoin crashed alongside traditional markets last month, even though it often acts as an uncorrelated asset.
“When investments sharply fall, investors naturally seek out ‘safe haven’ assets — things that will not lose their value (usually USD). But everyone rushing to the exit at once produces a liquidity crisis, where the number of sellers far surpasses the number of buyers, which further drives prices lower and lower.
To add insult to injury, many large asset allocators held leveraged positions, where only $1 of real value was backing ~$2-$3 of borrowed value. When markets crashed, these leveraged positions were in jeopardy of becoming insolvent and being forced closed, further placing a premium on USD. The general sell-off combined with a massive deleveraging event resulted in an intense rush for cash. In these moments, investors do not sell what they want to sell, they sell whatever they can. This includes Bitcoin and other cryptocurrencies, but every liquid market saw deep losses on March 12th.”
Crypto analyst Josh Rager says all bets are off if equities take another big plunge.
Although he’s optimistic on Bitcoin’s price action from a technical perspective, Rager says crypto traders should only expect BTC to hold up if the stock market can avoid another big breakdown.
$BTC still moving steady with stock market
Again, not a 1:1 correlation but no reason to draw $2k to $3k BTC meme charts
Unless the $SPX tanks, Bitcoin will hold above $6k
Potential future pullbacks in both markets but until stocks drop, I'm not bearish on Bitcoin price pic.twitter.com/17NfYla28O
— Josh Rager 📈 (@Josh_Rager) April 22, 2020