Bulls seem to be dominating the supposedly risky corners of the financial market.
Bitcoin {{BTC}}, the leading cryptocurrency by market value, rose nearly 13.5% to $48,300 in the seven days to Feb. 12, the biggest single-week gain since October, according to CoinDesk data. At the same time, CoinDesk 20 Index, a measure of the biggest cryptocurrencies, has risen 11%.
The rally happened as continued inflows into the U.S.-based spot bitcoin exchange-traded funds (ETFs) likely overshadowed reports of bankrupt crypto lender Genesis seeking approval to liquidate its $1.6 billion bitcoin holdings. On Thursday, spot ETFs accumulated over $400 million in inflows, registering the best day in nearly a month.
The S&P 500, Wall Street’s benchmark equity index, rose for the fifth week, closing above the $5,000 mark for the first time on record.
According to Amberdata’s Director of Derivatives Greg Magadini, the boom in artificial intelligence-related stocks has driven the index higher, and the bullish momentum bodes well for the crypto market.
“It’s hard to say that AI is overvalued. We’re really at the beginning of the AI story and an explosion of adoption. How do you value the future of AI? It’s definitely unknown, in my opinion. Crypto is in a similar position. [It is] likely a compliment to AI technology given decentralized on-chain data assets and the unknowable future use cases,” Magadini said in an email.
“This investor risk appetite for tech is good for crypto and vice versa,” Magadini added.
Shares in NVIDIA, which are already up over 40% for the year, are leading the AI-led rally in stocks. Some observers are of the opinion that stocks look expensive, as the S&P 500 equity risk premium has dropped to its lowest since at least 2003.
The equity risk premium compares the projected annual corporate earnings growth with the yield on the 10-year U.S. Treasury note or the so-called risk-free rate to gauge the relative attractiveness of stocks.
The equity risk premium, which measures the reward for owning stocks over government bonds, is its lowest on record (going back to 2003)
Stocks are expensive compared to bonds, and bonds are expensive compared to cash pic.twitter.com/26lFhgtFNH
— Julian Klymochko (@JulianKlymochko) February 11, 2024
The sharp decline in the risk premium means stocks are expensive and Treasury notes are cheap. This does not necessarily imply risk aversion, which leads to outflow from stocks and cryptocurrencies into bonds.
“We can see that stocks are expensive (or treasuries are cheap) given this measure. Another way to read this is that risk-on sentiment is very strong in the market,” Magadini noted.