Bitcoin's record stocks' correlation
Nilesh Patil
Senior Commodity Trader | Corporate Strategy | Biofuels & Feedstock Origination | Carbon Markets & Sustainability
Bitcoin is moving in tandem with stocks like never before as both slump, but that link-up could yet bring some respite for the largest cryptocurrency if shares stage a rebound.
The late uptick in crypto prices mirrored gains in the U.S. stock markets. The 40-day correlation coefficient for the digital token and the tech-heavy Nasdaq 100 has reached almost 0.66, the most in data compiled by Bloomberg since 2010. A similar correlation with the S&P 500 is at a record, too.
Bitcoin has been positively correlated with the S&P 500 index (.SPX) since early 2020, according to Refinitiv data, meaning they broadly move up and down together. Their correlation coefficient has risen to 0.41 now from 0.1 in September, where zero means no correlation and 1 implies perfectly synchronised movement.
The cryptocurrency rout comes as investors have dumped shares in tech companies on expectations the US Federal Reserve will move to rein in loose pandemic monetary policy to combat inflation. Global stock markets posted their biggest declines in more than a year last week, with the fast-growing companies that powered the rally from the depths of the coronavirus crisis enduring intense falls.
Investors now forecast the Fed, the world’s most influential central bank, will raise interest rates three to four times this year, something that has sent bond yields surging. Higher yields on low-risk assets like US government bonds make the potential returns that can be earned through speculative investments like cryptocurrencies look less appealing, analysts say.
The sharp sell-off in digital assets also came a day after the Russian central bank announced on Thursday draft proposals seeking to ban all cryptocurrency trading and mining. The proposed regulations would also block cryptocurrency investment by banks and forbid any exchange of cryptocurrency for traditional currencies in Russia, one of the world’s largest centers for crypto mining.
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The central bank said in its 36-page report that the rapidly rising value of cryptocurrencies “is defined primarily by a speculative demand for future growth, which creates bubbles,” adding they “also have aspects of financial pyramids, because their price growth is largely supported by demand from new entrants to the market.”
The announcement initially had little impact on bitcoin, which rose as much as 3.7 percent against the dollar on Thursday. But by Friday afternoon in Asia the cryptocurrency had dropped over 10 percent from the previous day’s high to hit its lowest level since August.
Some analysts have suggested that bottom is $30,000, where Bitcoin could reach a support level if it continues to fall from now on. Wilfred Daye, head of Securitize Capital, the asset-management arm of Securitize, said $30,000 is psychologically important, and Bitcoin should find some support there. But, he adds, should the selloff continue beyond that to $27,000 “miners who got in at beginning of the bull market will be in trouble.”