- First Republic becomes the latest bank to collapse in the US
- Bitcoin rallied this week, as it did in March when SVB collapsed and the banking crisis began
- Our head of research, Dan Ashmore, argues that bitcoin remains a risk-on asset, despite claims from enthusiasts that a decoupling is occurring.
- Correlation with the stock market is still high, he writes, pointing to changed expectations around interest rate policy as bitcoin has moved upward.
Recently (again) the market has been in talks between Bitcoin Getting rid of shares. Something about bitcoin offers an alternative store of value outside the confines of the legal world, a proposition that has suddenly become much more valuable as the banking turmoil stokes American anger.
Let me start by saying that I don’t think my opinion is very valid here. I can’t predict the future. But I want to see the numbers because I believe they prove that this theory, that bitcoin is decoupled, is objectively wrong.
i wrote a Detailed analysis On bitcoin’s correlation with stocks in March, when the theory basically came out as Silicon Valley Bank collapsing while bitcoin raced up. The same logic applies now, so I’ll try to summarize it by refreshing the same numbers.
And a quick note – this article is in no way about what I believe about the trajectory of bitcoin over the long term. Whether bitcoin breaks away in the future and establishes itself as a store of value similar to gold, uncorrelated to other riskier assets, is a debate for another time and I won’t go into it here. I’m totally watching the price action Today And saying that, by May 2023, bitcoin is trading like a highly risky asset completely detracts from this unconvincing vision.
Bitcoin’s relationship with Nasdaq
The natural place to look is tech stocks, one of the riskier subsectors of the equity universe. The Nasdaq is often viewed as the benchmark for the sector, being a tech-heavy index. So let us chart bitcoin’s relationship with the Nasdaq over the past few years.
Using the 60-day Pearson measure, the chart shows that the correlation has jumped significantly over the years. For the most part, however, it has shown a relatively strong correlation, often staying above 0.5.
There were one or two dips. The first is clearly May/June 2021, when bitcoin fell from $63,000 to $31,000 for no apparent reason, before climbing back into the high sixties later that year.
The second major drop in correlation is in November 2022. It was none other than the FTX collapse, a startling explosion that sent shockwaves through the crypto industry. At the same time, stocks actually advanced significantly as softer inflation data emerged and increased optimism over the future path of interest rates. Cue the big drop in correlation.
Therefore, there have been two periods of notable, and very large, decorations. Both of these happened when cryptocurrencies melted, independently of the stock market. If you look closely at the past year – I’ve shown the correlation to last year below – you’ll see another big divergence in the summer of 2022 when the crypto “bank” Celsius withdrawals stop.
And most importantly, the correlation has come back exponentially each time. In March, when bitcoin outperformed after the banking crisis.
But, did it really outperform in March? The above correlation remained relatively high, certainly nowhere near the previous episode of decorum – and much more brief. Sure, bitcoin rose further than the Nasdaq post-SVB, but it also fell before guarantees that deposits backing the second-largest stablecoin, the USD coin, were safe. In fact, bitcoin did what it has been doing – sold off more aggressively and then bounced back strongly. Because, well, it’s risky.
Also, the elephant in the room is the Federal Reserve. The market has been moving away from Fed policy expectations all year, and that was the real reason for the movement in March as well as this week.
With the collapse of the SVB, the market reacted to the announcement of a massive liquidity injection by the Fed, as well as expectations that rates may not be raised as much in the future as a result of a creaking banking system. These are both good things for risk assets and hence bitcoin has been bullish. Again, not because of any possible collapse of the fiat system.
Not to mention, these banking problems stemmed from risk management, a completely different, period to the banking issues of the GFC in 2008, which was a full blown bankruptcy crisis built on terrible underlying assets (subprime mortgages). Today, the banking crisis is still a crisis, but a regional crisis stemming from the most aggressive hiking cycle in recent memory, which has seen bank assets fall in value and hoard deposits to take advantage of those higher rates. is pulled, causing one to become unstable. Bank runs as trust evaporates.
We’ve seen a similar development again this time around, as First Republic Bank fell last week after revealing it saw over $1 billion in withdrawal requests last quarter.
Again, the market reacted to these things breaking down, saying: “Well, the Fed can’t hike much. It’s good for risk assets.” Looking at Fed funds prospects, a 25 bps hike is expected today (May 3) and after that… nothing. The market is seeing this as the last rally.
Therefore, it is important to keep an eye on the latent variable (interest rate policy) when assessing correlations and trying to figure out why bitcoin is moving. For the moment, the numbers are pretty clear, and the conclusion clear: Bitcoin is trading like a risk-on asset. Maybe we don’t even need to see the correlation. Take a look at the chart below plotting bitcoin’s returns since the beginning of 2022 against the Nasdaq. Do you really want to argue that these properties are unrelated?
The numbers speak for themselves. Again, this is not speculating about what will happen in the future. Tomorrow, bitcoin could go to $1 million and the Nasdaq could go to zero for all I care. Bitcoin may one day access that uncorrelated store of value position. But for now, the numbers are clear: It’s trading like a risk asset.