key takeaways
- Bitcoin has deviated slightly from stocks over the past few weeks.
- correlation has bounced back
- Tech-heavy Nasdaq continues to trade in lockstep with bitcoin as investors in both asset classes turn expectations around interest rates
The market has had a strange few weeks. The banking wobble over the past few weeks, triggered by a bank run on crypto-friendly Silicon Valley Bank (SVB), has made everything a little messy.
One of the most curious aspects of this was the deviation from the normal bitcoin/stocks relationship. Or, sort of. Bitcoin ran up while the market digested the banking news, with correlation – at least on one short-term rolling 30-day metric – dipping according to the chart below.
However, the chart also shows that the correlation is back.
as i wrote in a Detailed analysis At that point, we have seen these cases of temporally dipping correlations for quite some time over the past year, most notably before the FTX crash in November as well as the Celsius and LUNA crashes.
But in each case, the correlation roars back. The above chart shows that it has started doing the same this time again. And the chart below shows that no matter how you spin it, the correlation here is pretty close (and forgive the Axis offense on this one, please).
what happens next?
The interesting question is what will happen next. The key development recently has been with respect to expectations around the future path of interest rates.
Predictions have been changed. With the rise in interest rates exposing the mismanagement of the aforementioned collapsed banks, the trouble has made markets anticipate a pullback in plans going forward.
Instead of future hikes, there are cuts in the pipeline now, or at least according to the prospects implied by Fed futures.
And it was this new interest rate paradigm shift, which happened last year as inflation roared and it became clear that central banks needed to act, that kicked off the correlation between stocks and bitcoin.
It’s not that one is controlling the other, it’s that Jerome Powell is controlling both. Tech stocks are especially sensitive to interest rates, given that the sector is valued so heavily by discounting future cash flows – and the lack of current gains – that is why correlation, and bloodshed, in 2022 bitcoin And the Nasdaq was so strong between.
Whether this likely retreat from tight monetary policy leads to a divergence in the correlation in the future remains to be seen. Perhaps it will to some extent, but at the same time, it’s hard to come up with a strong argument that bitcoin is truly poised to diverge.
Decoupling remains the ultimate bull vision for the asset, and perhaps it will get there one day in the future. But there is no evidence beyond the blind hope of those in the region that it is imminent.
On a multi-year time horizon in the future? It’s anyone’s guess. But if the past few years have taught us anything, it’s that stocks and bitcoin are paired at the hip, especially in tech stocks. The past few weeks, and the resumption of this trend, have actually been more of a reminder of it than evidence against the theory.