Bitcoin is less connected to traditional markets. What does this mean and where will it lead?
Throughout its history, Bitcoin has correlated quite often with traditional assets like stocks or bonds, i.e. it has moved in a similar fashion. This is ironic because cryptocurrencies are often contrasted with the traditional finance sector. However, the day before, the situation seems to have changed – at least some crypto personalities, including Gemini founders, the Winklevoss brothers, have started talking about it. Here’s a closer look at the situation.
Today, the situation with Bitcoin and the cryptocurrency market in general does not look good. In particular, BTC is valued at $19,186, which is almost the same as Sunday’s result.
Changes in cryptocurrency rates over the past 24 hours
The price of BTC and other coins has remained relatively stable for many weeks. With this in mind, cryptocurrencies have lost their popularity among newcomers, which can be gauged by using the relevant Google query. Bitcoin’s popularity on this search engine is now at its lowest point in the last year.
Popularity of the Bitcoin query on Google
What does Bitcoin’s exchange rate depend on?
Here’s a tweet posted by Cameron Winklevoss, in which he shared his perspective on what’s happening.
Bitcoin has been remarkably resilient over the past few weeks, despite the stock market losing trillions of dollars in capitalisation. I don’t know if this can be considered a bottom, but there has been a curious upward trend in the independence of the BTC price.
The resilience of cryptocurrencies amidst the problems of traditional finance has really surprised many investors. What's more, it has been written about by journalists, among others. As we told you last week, The New York Times ran an article titled "Currencies Around the World Collapse. But not Bitcoin." The piece looks like this.
The New York Times article
Indeed, Bitcoin has recently outperformed popular stock market indices in terms of returns. In the past week, BTC has gained 3 per cent, while the Nasdaq 100 and S&P 500 indices have each lost around 1 per cent in value. However, on a larger scale, cryptocurrencies have also proved more resilient, meaning they have shed less.
According to analyst platform IntoTheBlock, a similar trend is also evident on a scale of at least the last 90 days. In three months, BTC rose in value by almost 1 per cent, while the Nasdaq 100 fell 3 per cent and the S&P 500 fell 4 per cent.
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More precisely, the degree of correlation is shown by the corresponding index, which is compiled by IntoTheBlock analysts. This index ranges from -1 to 1. At -1 the prices of the two assets move in opposite directions, at 1 they move in the same direction and at 0 they are completely independent of each other. The screenshot below shows the correlation of BTC and ETH to the most popular traditional assets.
Correlation of BTC and ETH with traditional assets
Another chart shows the change in the correlation index of BTC to the S&P 500 stock index.
Correlation of BTC and S&P500
IntoTheBlock’s head of research Lukas Outumuro commented on these market trends in an interview with Decrypt. Here’s his take on what’s happening.
Bitcoin’s correlation with equities has indeed declined over the past few weeks, but still remains quite high.
However, Outumuro is confident that even if the correlation has fallen over the past month, there is reason to expect it to rise in the foreseeable future.
Reduced liquidity due to higher interest rates and quantitative easing continue to put pressure on high-risk assets, including cryptocurrencies.
In other words, the expert believes that the Fed's current policy, together with the key rate hike, will affect all asset classes in one way or another. In that case, Bitcoin's correlation with traditional assets will eventually rise.
An anonymous cryptocurrency enthusiast under the pseudonym Unusual Whales, who runs an options platform of the same name, also believes that it is too early to expect Bitcoin’s price dynamics to be completely independent of the stock market for now. Here’s his rejoinder.
Perhaps it’s an outperformance effect. It’s hard to say given that the market itself has changed so much this week.
Cryptocurrency investors
Part of this change came after the Bank of England announced on Wednesday that it was launching an aggressive bond buying to stabilise the markets. The UK government’s economic strategy has led to a sharp rise in interest rates and a depreciation of the British pound to lows not seen since the 1980s.
Nate Maddrey, head of research at Coin Metrics, also had an opinion on the matter.
The correlation between BTC and the S&P 500 has risen to historic highs since March 2022, as both markets have been impacted by US Federal Reserve actions and other macroeconomic developments. Historically, BTC predominantly does not correlate strongly with the stock market, so there is always the possibility of a more rapid decline in correlation. But at the moment, the data does not show a significant breakaway from traditional markets.
Popularity of cryptocurrencies
We believe that the current situation in the cryptocurrency industry may be the reason for their growing popularity in the short term: after all, coins have proven to be more stable in recent weeks. However, one way or another, crypto is in a bear market phase, which even according to the most optimistic forecasts will last for at least a few more months. This means that fans of digital assets need to objectively assess the situation and be prepared for a possible deterioration of coins.
What do you think about it? Share your opinion in our Millionaire Crypto Chat. There we will discuss other important developments in the world of blockchain and decentralisation.
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