Why is crypto following stock market closer than ever before?

Posted on

It seems that the markets right now are nothing but the words of Jerome Powell.

If you look at the statistics, this is true. I plotted the correlation of Bitcoin against the S&P 500 since early 2017, and the results show that the correlation has generally picked up over time. It really undermines the point of the “inflation hedge” narrative that proved so popular during the pandemic.

But shouldn’t the correlations decrease over time? Actually it is not so. Think back to 2017, and the texture of it crypto landscape. It was still a niche property; It was only just starting to get into the mainstream – and certainly nowhere near the level of digital ink these days.

Today, we have public companies holding it. i visited el salvador This summer, where I paid for the goods with it. These are remarkable developments compared to a few years ago. Point being, bitcoin is now mainstream.

And being a mainstream financial asset – and one that is well beyond the risk spectrum – it will be really market influenced.


Indeed, this correlation has reached an all-time high this year, with the stock market moving in lockstep. What caused the upward shift? The interest rate environment has completely changed.

After a decade of historically low interest rates, inflation has risen sharply as a result of persistent money printing and stimulus spending through the pandemic. To curb this, central banks have been forced to hike, with the Federal Reserve leading the way in the US.

Nothing sucks liquidity out of the market more than rising interest rates, and this is especially true for high-risk assets, such as tech stocks, that carry discount cash flows back to the present — discount rates that are now available. are above average.

And so – and this is something that is often overlooked – bitcoin is now in a bear market while so is the broader market. Because for the first time in its existence, bitcoin is experiencing a macro climate that is not filled with quantitative easing, basement-level interest rates, and bullish sentiment. And it’s crumbling at its knees – just like every other financial asset is.

Relationships grow in crisis. Sellers are indiscriminate when quality takes flight; Liquidity is sought, defensive positions are taken and cash reserves are increased. Bitcoin, for the first time in its history, is experiencing the hard way.

In this context, it is no surprise that the correlation has increased.

Leave a Reply

Your email address will not be published. Required fields are marked *