Bitcoin's decline below $90,000 on Thursday catalyzed a stunning reversal across financial markets, raising questions about whether the cryptocurrency has become a tail wagging the dog for equity traders.
Steve Sosnick, chief strategist at Interactive Brokers, watched the correlation play out in real time. "Shortly before 11 a.m. EST, I was on a call, being asked about the rebirth of equity market enthusiasm," Sosnick wrote in a blog post. With the S&P 500 trading 1.5% higher at the time, his counterpart asked whether the rally could continue.
Sosnick said he was "becoming concerned because Bitcoin was once again flirting with the $90,000 level." When asked if a break in Bitcoin could really affect the entire U.S. stock market, he replied: "Unfortunately, yes. It's become such a proxy for speculation that I can't be the only person using it as a signal."
Minutes later, the S&P 500 gave back more than half its gains as Bitcoin broke lower. "For better or worse, I was proven correct almost immediately," Sosnick wrote.
Bitcoin plunged 6.5% to $86,286 by day's end, while Ethereum dropped 6.47% to $2,842.33. Total cryptocurrency market capitalization fell 5.55% to $2.97 trillion. According to Coinglass, liquidations reached approximately $833 million over the 24-hour period, with long positions accounting for $714 million and roughly 227,500 traders forced out.
Sosnick noted that algorithms appeared to be acting on the relationship between stocks and Bitcoin. "The moves in bitcoin and futures on the Nasdaq 100 line up almost perfectly over both the 2-day and 3-week periods," he wrote.
As a systematic trader himself, the pattern indicated algorithmic execution based on the correlation: "While correlation is not causality, that can become the case if traders large and small are using that as a basis for their decision making."
"This morning's stunning reversal is a sign that market psychology has become quite brittle," Sosnick wrote.
The selloff erased early gains sparked by strong Nvidia earnings, with the S&P 500 closing down 1.56% at 6,538.76, the Nasdaq Composite sinking 2.2%, and the Dow Jones Industrial Average dropping 386 points. All three indexes marked their largest reversal from an intraday high to negative territory since April 8.
Market conditions were also influenced by shifting Federal Reserve expectations, with decreased probability of a rate cut at the December 9-10 meeting following the delayed September nonfarm payrolls report, which showed 119,000 jobs added with unemployment at 4.4%.
