Bitcoin. Source: Adobe
Bitcoin’s correlation with US stock markets has just fallen to its lowest level in more than a year and a half. That’s according to crypto analytics firm CoinMetrics, which is presenting a chart showing that Bitcoin’s 30-day Pearson correlation between Bitcoin and the S&P 500 has just fallen below 0.20, its lowest level since September 2021.
That’s a major reversal since mid-2022, when bitcoin and stocks moved largely in tandem and the 30-day correlation briefly topped 0.7.
And given the divergence in the price of bitcoin (which has risen sharply) and the S&P 500 (which has weakened) over the past two weeks, this correlation is likely to continue to fall.
If it falls below 0.08, it would hit a three-year low.
Why is bitcoin’s correlation to stocks collapsing?
In 2021 and 2022, Bitcoin was largely viewed as a speculative technology/asset that should trade according to liquidity conditions, much like a tech stock.
That goes a long way to explaining why the cryptocurrency enjoyed such a big bounce in 2020 and 2021 when the US (and global) economy was overloaded with fiscal and monetary stimulus, before then aggressively retreating in 2022 when that stimulus was withdrawn ( mainly via an aggressive course). hikes by major central banks).
Bitcoin’s 2020/21 pump and 2022 dump meant its price moved largely in tandem with that of the US tech stock sector.
But the onset of a financial crisis in early 2023 is testing that relationship.
Instead of looking at Bitcoin as a speculative asset (like a tech stock), investors could finally start seeing Bitcoin the way its creators and proponents always wanted it to be — as a safe-haven alternative to the fiat-based central bank-centric fractional-reserve banking system.
In recent weeks, Bitcoin has made a decent claim to the title of “digital gold”.
Bitcoin is up over 40% from previous monthly lows below $20,000 as investors look for alternative, “harder” currencies/mediums of exchange, with the cryptocurrency rising alongside gold prices.
Fiat currencies (like the US dollar, euro, and British pound) are not considered as hard as gold and bitcoin, as their value can be more easily eroded by inflation.
Bitcoin has thus captured a safe-haven offer as US stocks languished, with investors worried amid uncertainty over how bad the current problems in the banking sector will get and how much this will affect the outlook for economic growth.
Here’s why BTC’s declining correlation to stocks is bullish
Bitcoin is not just a speculative technology that is likely to disappear soon.
It is an extremely robust, incorruptible, peer-to-peer decentralized payment system that offers a real, fairer and more transparent alternative to the existing financial system.
And investors finally seem to be treating it that way, a bullish sign for the cryptocurrency.
If the banking crisis worsens and stocks fall as a result, it should further boost Bitcoin’s safe-haven gains.
Even if US authorities manage to avert a crisis, the prospect of further significant Fed tightening has likely suffered a fatal blow.
The end of the migration cycle seems to be within reach.
And if easier financial conditions are on the horizon (meaning US yields fall), that should bode well for both gold and bitcoin.
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