Bitcoin's Drop Could Spell One For Nasdaq: Should Indian Investors Worry?
A coefficient of 0.8 implies a high degree of correlation between two things. Since 2020, the world's most popular cryptocurrency, Bitcoin, has shown a strong connection with the Nasdaq 100. Recently, Bitcoin's value dropped, making investors wonder if the Nasdaq 100 might follow the same trend. Over four years, the correlation coefficient, or how closely their price changes match, has been above 0.8. This means they often move in similar ways. A coefficient can range from -1 to 1. A value of 1 implies a perfect match, and -1 means a perfectly opposite movement.
Indian Investors Watch US Markets Closely
Indian investors often watch the US stock market movements to predict what might happen in Indian markets the next day. The US markets trade when Indian markets are closed, reacting to global news and economic events, especially from the US. The correlation coefficient between India's Nifty 50 and the Nasdaq 100 is 0.78, showing a strong connection.
Should the Indian Markets Expect a Drop?
Since March, Bitcoin has fallen over 8%, while the Nifty is up by 5.4%. Even though Bitcoin and Nasdaq 100 have a high correlation, the connection between Bitcoin and Nifty 50 is weaker. Based on weekly closing prices since June 2020, the Nifty's correlation coefficient with Bitcoin is 0.58, which is weaker than its correlation with the Nasdaq 100.
Impact on IT Stocks
The Nasdaq 100 includes many technology companies. India’s Nifty IT index, which represents IT stocks, also shows a strong connection with the Nasdaq 100. The correlation coefficient between Nifty IT and Nasdaq 100 is 0.77. When looking at Nifty IT and Bitcoin, the correlation coefficient is 0.68, which is higher than that between Bitcoin and Nifty 50 but still only moderate.
Conclusion
While Bitcoin's drop does show some indication of movements in the Nasdaq 100 and indirectly the Indian markets, the direct impact on Nifty 50 might be lower. However, sectors like IT that have a stronger connection with Nasdaq could see more significant effects. Investors should consider these correlations but weigh them alongside other economic indicators and global events.
In summary, while there is some reason for Indian investors to be cautious, the indirect nature of the impact suggests that one should not panic just yet. Instead, they should stay informed and closely monitor the global market trends.
