Sam Bankman-Fried breaks down how algos have played a big part in bitcoin's drop in light of the worsening Russia-Ukraine conflict
- Bitcoin's correlation to equities explains why it's falling more than the S&P 500, Sam Bankman-Fried said.
- Algorithms are assuming that if the S&P 500 moves 1%, bitcoin moves 4%, he said Thursday.
FTX chief executive Sam Bankman-Fried suggested that cryptocurrencies' recent correlation with equities explains why bitcoin is tumbling more than the benchmark S&P 500 as conflict escalates between Russia and Ukraine.
As seen in recent weeks, bitcoin has been moving in lockstep with equities. This is primarily because of the Federal Reserve's policy shift towards raising interest rates, which has caused US yields to spike higher, and has cemented the correlation between bitcoin and stocks.
After Russia launched a "full-scale invasion" into Ukraine on Thursday, global stocks tumbled along with a broad decline in the cryptocurrency market. Bitcoin fell to its lowest in a month to around $34,500.
Bankman-Fried took to Twitter on Thursday to break down his thoughts on the matter, saying that expectations of higher inflation in the last year had initially boosted both crypto and stocks in comparison to the US dollar.
He suggested the current fall in cryptocurrencies is being triggered by algorithmic trading, a process seen as better than human-executed trading because it's faster and based on pre-determined instructions.
While investors who trade based on fundamentals might be uncertain of what to expect next in terms of price action, algorithms rely on data based on recent activity, which decides that bitcoin should move in tandem with the S&P 500, he added.
These algorithms assume, based on data, that if the S&P 500 moves 1%, bitcoin moves 4%, he said.
"Fundamental investors are neutral, but algorithmic investors see the S&P 500 go down 4%, and so expect BTC to go down 4*4%=16% based on historical studies," the crypto billionaire wrote.
"There's a push and a pull, with fundamental investors buying and algorithmic investors selling; on net, BTC ends up halfway in between, down 8% on the day."
Last week, investors appeared fairly optimistic that a peaceful solution could be reached between the Western allies and Russia. But that optimism was quashed on Thursday, with Russia's incursion into Ukrainian territory. This left financial markets reeling, and the sell-off in risk assets was led by the Russian ruble itself.
Bankman-Fried said his hypothesis about the role algos play is just based on a hunch, and he doesn't know for certain what exactly has been driving crypto or stocks given the backdrop of a tense geopolitical atmosphere.
"Who knows what will happen--anything could and I don't mean to imply that I know what will happen," he said. "But I also think we're probably in a new regime than we've been in the last year and a half. We'll have to see how things work here."
The S&P 500 is down 11% so far this year, while bitcoin is down 24% in the same period.