The co-founder and chief financial adviser of Fundstrat Global Advisers, Thomas Lee, has noticed a correlation between the MSCI emerging markets index and the price of Bitcoin over the past year. Not only is there is a noticeable correlation, with the MSCI peaking in January 2017 around the same time as the crypto and Bitcoin markets, Lee also thinks there is a causation.
The MSCI emerging markets index is essentially a weighted index of the combined stock market caps of Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. These countries’ stock markets are considered less developed and more risky than fully developed countries but can lead to greater gains than typical stocks.
To break down trends during the time Bitcoin has existed, MSCI rose steadily after the launch of Bitcoin in 2009, reaching a peak in 2011 and crashing to a minimum towards the end of 2011. Bitcoin’s price was very low back then, less than USD 10 but did hit a minimum in late 2011 at the same time as the index, according to Bitstamp data. In early 2012, MSCI rallied, coinciding with a Bitcoin rally, before dropping again.
The MSCI rallied through the middle of 2013, coinciding with a Bitcoin rally to USD 250. One notable break in the correlation is that during the first Bitcoin rally to over USD 1,000 in late 2013, the MSCI was steady if not declining. Then, it went into a long bear market which bottomed out in early 2016 and this strongly correlated with Bitcoin’s long bear market at the same time. A rally from 2016 through early 2018 exactly coincided with the strong Bitcoin and crypto rally. The index has been in a strong decline since then, at the same time the Bitcoin and crypto markets have been in a bear market.
The emerging markets index and Bitcoin markets have a very obvious and strong correlation. Lee says the causation is that hedge funds put money into more risky investments like the MSCI and Bitcoin at the same time, and when hedge funds divest from the MSCI, they also take holdings out of Bitcoin and put them into more mainstream stocks and assets.
Additionally, Lee speculates that emerging market economies have been heavily investing in Bitcoin and crypto, and when the MSCI declines, that indicates these emerging economies have less money to invest in crypto and Bitcoin. He calls this the wealth effect.
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