Anyone who follows me knows that I like to have a macro view of Bitcoin. It is now firmly entrenched as an asset class on the big stage, and that means it is subject to the whims of the broader market – for better or for worse. I often say it’s the dog’s tail, with the dog being the stock market. But I wanted to put together an article detailing how exactly Bitcoin’s movements have related to the stock market this year, to test this theory. The first step was, of course, correlation. I’ve plotted the correlation between the stock market and Bitcoin since Russia invaded Ukraine in February (Pearson’s 3-month analysis was my metric of choice). It is evident to see that this increased around April. In fact, that’s when we made the transition to a new interest rate paradigm. Inflation became so great that it could no longer be left out, and the Federal Reserve was forced to start raising rates, ending the era of free money. Let me put the Fed rate on the same chart: So this increase in correlation around April makes sense. As we enter a new environment, cheap money and quantitative easing are wiped out and risky assets take a big hit. The old adage holds up – “the correlations go to 1 in a crisis”. And with this massively bearish change in interest rate, risky assets have in fact sold like there’s no tomorrow, with the correlation increasing accordingly – to as close to a perfect 1 as you might expect. So why then the drop in correlation of this near-perfect score from 1 to 0.5 in August? Well, my theory is this: let’s not forget the sheer violence in the cryptocurrency market during the summer, when markets melted and capital fled faster than a UK prime minister. Luna, one of the top 10 coins, disappeared into thin air, taking billions and billions of dollars with it. Then, in August, with the cryptocurrency still reeling, the stock market bounced. But with the pain cryptocurrencies have just been through, investors have been hesitant to raise prices back as they worried about systemic failures and other events that could trigger another sea of cascading liquidations. Make no mistake – the Terra contagion was an idiosyncratic event for cryptocurrency and hugely undermined confidence in space. Let me enter the S&P 500 to show that it is rising in August, while Bitcoin politely refused to follow it: So, as can be seen in the chart, starting in September the stock market goes down again, and the Bitcoin decides to follow him again. Fear in cryptocurrency markets this year is almost unprecedented – and these charts above show it more than ever. Bitcoin is holding the stock market’s hand – until things started looking more bullish in August, when Bitcoin just wasn’t ready to let the good times come back. So we are currently back to correlations around the 0.8 mark – an incredibly high number. I’m afraid it sounds like a broken disk here, but anyone extrapolating information from previous encryption cycles is completely missing the point, and I believe these graphs show why. We had a structural break and this is a whole new paradigm. Surprisingly, money costs something now, with interest rates no longer zero. Driving to the shop is a luxury, where I paid £8 for a beer over the weekend. £8! Inflation is here, as are high interest rates – and that’s a nasty cocktail for any risky asset. But for Bitcoin, he has never seen any of this before. It never even existed in a bear market – it was launched in 2009, just as the stock market went through one of the longest and most explosive bull runs in history. But no more. Bitcoin is now in the trenches, with inflation rising, interest rates rising and a geopolitical climate getting worse by the day. It’s not a good time for anything that lives far off the risk spectrum – something Bitcoin’s price action this year shows. So, to wrap this up, keep an eye on the stock market. If it goes down, it will keep dragging Bitcoin along.
Largest exchange-listed Bitcoin miner may file for bankruptcy; understand
Core Scientific (CORZ), the world’s largest publicly traded Bitcoin (BTC) miner, is in danger of becoming insolvent and bankrupt. According to the latest quarterly results sent to shareholders, the company’s reserves are at their end. As per the data presented, the company sold virtually all of its BTC reserves throughout […]
