Crypto Declines as Nasdaq Selloff Highlights Growing Tech Correlation, StanChart Says

The crypto market has been on a rollercoaster ride in recent weeks, with Bitcoin and other major cryptocurrencies experiencing significant price fluctuations. The latest downturn comes as the Nasdaq Composite Index, which is heavily weighted towards tech stocks, has been in a correction phase. Standard Chartered (StanChart) has highlighted the growing correlation between crypto and tech stocks, suggesting that the selloff in tech shares is contributing to the decline in crypto prices.



The correlation between crypto assets and tech stocks has been increasing in recent years, with both asset classes experiencing similar price movements. This growing interdependence has raised concerns about potential contagion effects, as market sentiment in one asset class can spill over into the other. The IMF has warned that the increased co-movement and spillovers between crypto and equity markets could pose risks to financial stability, particularly in countries with widespread crypto adoption.

The recent selloff in tech stocks has put pressure on crypto prices, as investors have been rotating out of riskier assets and into safer havens such as government bonds. The yield on the 10-year US Treasury note has been rising, making bonds more attractive relative to tech stocks and cryptocurrencies. This has led to a flight to quality, with investors preferring the safety of government bonds over the volatility of tech stocks and cryptocurrencies.

The growing correlation between crypto and tech stocks has important implications for portfolio diversification and risk management strategies. As the correlation between these asset classes increases, their perceived risk diversification benefits decrease, and the risk of contagion across financial markets rises. This is because when two assets move in lockstep, they tend to react similarly to market conditions, reducing the potential for one asset to act as a hedge against the other.

Investors and portfolio managers should reevaluate their diversification strategies and consider the potential risks associated with the growing correlation between crypto and tech stocks. To mitigate these risks, they may want to explore alternative assets or strategies that have lower correlations with these asset classes, such as commodities, real estate, or hedging strategies using derivatives.

Furthermore, regulators and financial institutions should adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision, as suggested by the IMF. This framework should encompass regulations tailored to the main uses of crypto assets and establish clear requirements on regulated financial institutions concerning their exposure to and engagement with these assets. By doing so, they can help mitigate the financial stability risks stemming from the crypto ecosystem and promote more resilient portfolio diversification and risk management strategies.

In conclusion, the growing correlation between crypto and tech stocks has important implications for portfolio diversification and risk management strategies. Investors and regulators should take these findings into account and adapt their strategies accordingly to better navigate the evolving landscape of financial markets.