The U.S. stock market appears to have finally gotten over the crypto-driven volatility after a sustained period of major price swings. Since the start of the year, the market has experienced short-lived spikes in stock prices, which have often come tumbling in equal measure, thereby pushing volatility to new levels.
2017 was marked by a massive increase in the price of the pioneer cryptocurrency bitcoin, which grew nearly 20 times in value in under 12 months. This resulted in a significant increase in the number of investors looking for ways to make money with cryptocurrency in a bid to capitalize on the bitcoin hype.
The effects of this wave of change in the market spilled over into 2018, with some crypto enthusiasts predicting even more rallies. And as many investors shifted focus to crypto, there was a significant selloff in the stock market. Some blamed the selloff on a potential market correction, but the volatility was too high to rest on correction alone.
In the past year, the CBOE Volatility Index (VIX) hit 37.5 points before tumbling back to the low 20s. It has since stabilized to trade at the low- to mid-20s level, but this is still several points above last year’s average of approximately 10.5 points.
Analysts attributed the increased volatility to the impact of cryptocurrency prices, which, led by bitcoin, swung as much as 20% within a few days of trading. This volatility was further fueled by last year’s rally that saw bitcoin come close to hitting the $20,000 mark in December.
The hype in the cryptocurrency market was rising so much that some investors were beginning to switch from income-driven assets to the crypto market. Warren Buffett (Trades, Portfolio) warned investors that the hype in the market, and especially bitcoin, would be short-lived, citing the fact it lacked intrinsic value, which made it susceptible to a major collapse. He said investors were wrong to accommodate big price movements in cryptocurrencies.
Those who heeded his warning before the start of the year are probably celebrating, especially if they managed to cash out of their bitcoin investments. Those who held on for a dream payout, however, are probably regretting that decision as the lead cryptocurrency has plunged more than 60%.
Volatility in the cryptocurrency market remains significantly high as new cryptocurrencies are launched every month. The general excitement, however, seems to be slowing after the recent plunge, which could be positive for stock market investors.
As more investors continue to resist the sway of the cryptocurrency market, some of the money will head to the stock market, thereby boosting demand. This could also compensate for the selloff that occurred between Jan. 26 and Feb. 8. During this time, the S&P 500 Index and its exchange-traded fund, the SPDR S&P 500 ETF (SPY, Financial), declined more than 10%, which is one of the biggest declines in its history.
Since then, both have regained some of their losses, rallying as much as 8% between Feb. 8 and March 9, before plunging back to the current levels. The S&P 500 Index is down nearly 3% this month, but much of this decline could be associated with the performance of some of the index’s largest companies, including Facebook Inc. (FB, Financial), which is dealing with a major data breach debacle.
Nvidia Corp. (NVDA, Financial), Twitter Inc. (TWTR, Financial) and Netflix Inc. (NFLX, Financial) have all fallen over the last two trading sessions, declining more than 12%, contributing to the index's decline. Facebook has fallen more than 17% since mid-March.
While the major indexes are still trending downward, they are nowhere close to experiencing a major market plunge like the one witnessed in February.
Conclusion
Although cryptocurrency is still having an impact on the market, the overall effects appear to be waning, perhaps creating an environment suitable for value investing.
Disclosure: I have no position in any security mentioned in this article.
