Stocks and Bitcoin prices could correct sharply if Dr. Anthony Fauci’s dire coronavirus warning plays out.
Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases and a key member of the White House coronavirus taskforce, says the number of daily infections in the U.S. could reach 100,000 per day if immediate precautions are not taken to prevent the spread of the virus.
As Fauci issued this warning, stocks reacted with caution and investors are anticipating that a downturn in equities markets may lead to a correction in Bitcoin (BTC) price.
Fauci also cautioned that an effective vaccine may not arrive as quickly as the medical community expects. He said on July 1:
“There is no guarantee … we’ll have a safe and effective vaccine… I am very concerned because it could get very bad.”
In recent months, the price of Bitcoin has mirrored that of U.S. equities and if prolonged restrictive measures trigger another sell-off of risk-on assets BTC could be vulnerable to another major pullback.
BTC-USD versus the S&P 500. Source: Skew.com
Investors in the traditional financial market are simply confused
In large part, the majority of institutional investors in the U.S. and Europe are still cautious about equities. In early June, FT reported that hedge funds were getting ready for a stock market crash. Some large-scale hedge funds, including Fasanara Capital, had up to 70% of their holdings stored in cash.
The unpredictability of the pandemic has forced high-net-worth investors to remain skeptical towards equities and if newly emerging data about the virus continues to worsen, investors may search for shelter in risk-off assets.
For Bitcoin, given its high correlation with stocks since March, a stock market downturn might cause a crypto market pullback.
Bitcoin recovery since March 13. Source: TradingView.com
The market is at a point wherein high-profile strategists are struggling to evaluate economic data and corporate figures. RBC Capital Markets head of U.S. equity strategy Lori Calvasina said:
“The numbers are sort of all over the place.”
While strategists remain uncertain about the near-term trend of stocks, the demand for cash and safe-haven assets is increasing.
According to data from the Federal Deposit Insurance Corporation (FDIC), bank deposits increased by $2 trillion during the pandemic. It indicates that investors are increasingly moving away from high-risk assets to mitigate risk.
Brian Foran, an analyst at Autonomous Research, said:
“A lot of banks are saying, `There’s frankly not much we can do with it right now.’ They have more deposits than they know what to do with.”
A continuous rise in investors’ appetite for cash and declining demand for risk-on assets may lead to a Bitcoin market slump.
Despite all the cash in the market, Bitcoin isn’t recovering
It is not just the traditional financial market that is seeing an increase in cash savings. Tether (USDT), the most dominant stablecoin in the crypto market, recently surpassed $10 billion in market capitalization.
Depending on how the data is interpreted, the sharp increase in Tether’s valuation may mean an increase in the capital that’s waiting on the sidelines to get into Bitcoin.
Despite the growing amount of cash in the financial market and in crypto, both stocks and Bitcoin have consolidated in recent months. Almost immediately after the balance sheet of the Federal Reserve contracted, stocks and crypto assets fell simultaneously.
The trend suggests that investors are waiting for additional economic data and more insight into how the U.S. economy will respond to the resurgence of the coronavirus.
The reluctance of market participants engaging with risk-on assets could possibly lead to increased selling pressure on BTC in the near-term.