Bitcoin sees the prospects of undergoing broader downside corrections as hedge funds rush to short stocks that rose a lot during the covid-19 pandemic.
As Financial Times reported, some fund managers have increased their bets against the shares linked to technology, home gym equipment, grocery retail, and healthcare. Tim Campbell of Singapore-based hedge fund Longlead Capital Partners, for example, called these stocks “the COVID over-earners.”
The co-founder/chief investment officer said that the current earnings trajectory of some pandemic winners seems unsustainable in the long-term. He assumed that they would return to the pre-coronavirus growth rate at some point.
Analysts believe that estimating the actual value of stock market gainers is not easy, especially amid an environment of ultra-low interest rates and massive central bank and government stimulus that have supported even the worst-looking stocks during the pandemic. Andrew Sheets, the chief cross-asset strategist at Morgan Stanley, noted that technology which was the year’s best performing sector, is at the forefront of seeing the most significant declines. He told FT:
“If we’re successful in getting a vaccine and the market thinks 2021 looks more normal, investors may think ‘let me sell companies where it’s as good as it gets now and buy companies with more cyclical earnings’.”
Bitcoin and the US stocks climbed and corrected together amid the covid-19 pandemic.
Analysts said that the Federal Reserve’s near-zero interest rates, coupled with its infinite bond-buying program, trimmed yields of the US government bonds. So investors got more interested in riskier assets, which led them to crypto industry and equities.
Additionally, the US Congress’s decision to pass a $2 trillion stimulus aid stressed the U.S.D. That further prompted investors to look for havens elsewhere, primarily benefiting Bitcoin. It increased by more than 200 percent during the greenback’s decline.
A potential fall across the US stock market risks putting Bitcoin on a similar downside trail. Long-term crypto investor Gordon Gekko called it a “second wave effect” – wherein investors dump their most profitable assets to offset losses elsewhere.
When the stock market revealed signs of plunging harder than usual, investors de-risked their portfolios by shorting the most profitable assets for cash. Therefore, gold and Bitcoin – two of the best-performing assets before the crash – surged alongside the S&P 500, the Dow Jones, and the Nasdaq Composite.
Fund managers holding serious bets against the booming stock market also face the risk of losing their capital. It is due to the hopes that Congress would pass the second coronavirus relief bill by the November 3 US presidential election.
The package, which may fare between $1.6 trillion to $2.3 trillion, would decline the appeal of holding cash further. As a result, investors would inject more money into the stock and commodity markets based on the so-called “There-Is-No-Alternative” factor.
Bitcoin could benefit from the sentiment, as well.