Is Bitcoin’s correction a precursor for the market?

One of the most powerful, and potentially long-standing, impacts of the pandemic was the so-called democratisation of investing. With over a billion people stuck at home, many of whom were in secure work, or alternatively the beneficiaries of the largest stimulus package in history, a large portion turned to investing to fill the time.

At its core, this must be seen as a positive, as ultimately the sharemarket is intended as a place in which those with capital provide it to other people and companies seeking to grow and expand. However, many experts are now suggesting that this flow of so-called ‘retail’ capital has been a key driver of the sharemarket’s consistent overvaluation.

Consider, for instance, that in 2021, the Commonwealth Bank reported that 550,000 new trading accounts were created, the majority of which were using their CommSec Pocket App to trade. The result was a 37 per cent increase in trading value compared to the prior year and a doubling of the number of trades, so much so that these were called-out by management despite the dominant position of its traditional lending business.

Yet the share market wasn’t alone in garnering the attention of first-time and predominantly millennial investors; crypto wasn’t far behind (or perhaps ahead). According to analysis by eToro, as many as 38 per cent of those surveyed across the world already invest in cryptocurrencies, and as many as 33 per cent of those aged between 18 and 34 intend to do so in the next 12 months.

So why am I restating all this data? Because, on a high level at least, there appears to be some commonality between the investors that have driven crypto, and those now considered to be the “incremental” capital driving stock markets. This is important, as it may provide an insight into the market that lies ahead for all of us.

A quick look at any finfluencer’s account on Instagram, Tik Tok or Twitter highlights that investing has very much become a key reason for social interaction. Message boards are full of support for first-time investors, and in most cases, positive and accurate information.

One of the most popular terms to come out of the crypto sector is “buy the dip,” something which has expanded into equity markets ever since the pandemic. And why not? It has worked a treat, for the last decade at least, with nearly every selloff in equity markets ultimately returned in spades for the patient and optimistic investor.

But the period since 2020 has been nothing like a normal market, with the worst daily falls in most sharemarkets reaching just 3 to 4 per cent, nothing like the 8 to 10 per cent seen in the depths of the pandemic (or the GFC, for that matter.) So while buying the dip has worked on every occasion in the last 12 to 18 months, it likely hasn’t been truly tested.

What will happen when the most popular index strategies, which are the investment of choice for many new investors, experience a real correction, exceeding 10 per cent? Only then will we know how much of the money invested is ‘play money,’ and how much is actually needed for another purpose, like running a business or buying a house. 

With Bitcoin now down over 30 per cent from its high in 2021, the direction it takes from here may well provide a precursor for what will happen in the stock market in the year to come.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.