Bitcoin’s Correlation to the Stock Market Continues to Fall: A Bullish Sign?
As decentralized digital assets, Bitcoin and the crypto market at large has often been regarded as an isolated bubble or safe haven from the traditional stock market.
But as an asset class, cryptos have always been fundamentally tied to equities, closely tracing price levels of major indices. This was clearly displayed in the global stock market crash last March, as Bitcoin plummeted nearly 50% as the S&P 500 and NASDAQ index both suffered 30% losses.
In some ways, however, this correlation has been a blessing for the crypto market as of recent. Since the start of 2021, cryptos roared to new highs, with Bitcoin and Ethereum returning 100% and 150%, respectively. With historically low interest rates and the Federal Reserve’s extensive repo operations, the tech sector and NASDAQ rallied and even propped up the crypto market. However, recent fears of rising interest rates and treasury yields have led to a mass sell-off, sending the NASDAQ and Bitcoin tumbling 10% from their respective highs.
Bitcoin Monthly Moving Correlation to Equities Drop
Bitcoin’s 30 day moving correlation to equities spiked to 0.4, the highest it had been in months. Many investors and analysts expected further correction for the tech-heavy NASDAQ index, as higher interest rates would erode future cash flow and debt-heavy growth stocks would continue to lose their appeal. With high correlation levels and treasury yields rising, indicators pointed towards Bitcoin trending lower short-term.
However, the major cryptocurrency recently broke its correlation with the NASDAQ. This week alone, Bitcoin’s correlation levels to equities continued to drop, ending the week just below 0.2. While not necessarily a bullish indicator, this is a positive sign for Bitcoin’s short-term price level.
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This is due to the fact that the NASDAQ continues to face downward pressure, as tech’s astronomically high valuations become harder to justify with current macroeconomic developments. Under previously high correlation levels, Bitcoin’s potential upward movement beyond $60,000 would have likely been dampened by the bearish sentiment setting in for tech stocks.
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