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Bitcoin Correlation with Stocks at Lowest Level This Year

  • Bitcoin has drifted from U.S. stocks, with a 40-day correlation coefficient with the Nasdaq 100 falling below 0.50, levels that haven’t been seen since January.
  • With the risk that the U.S. could be pushed into a recession by a rapidly tightening Fed, the breakdown of the correlation between Bitcoin and the Nasdaq 100 could be telling.

As the cryptocurrency markets deleverage from the fallout of Luna, Three Arrows Capital, BlockFi, Babel Finance and a string of other centralized borrowers and counterparties, Bitcoin has done something unexpected, it’s started to drift from its correlation with stocks.

For most of this year, Bitcoin has been seen and traded like a risk asset akin to a high-growth technology stock, and its correlation with the Nasdaq 100, an index of U.S. tech stocks, hitting as high as 0.68 at one stage (a perfect correlation of 1 means that two assets move in lockstep).

But with the cryptocurrency markets in a massive unwind of leveraged positions, Bitcoin trading volumes on exchanges have thinned and blockchain analysis appears to be suggesting that more investors have become long-term “hodlers.”

As a result, Bitcoin has drifted from U.S. stocks, with a 40-day correlation coefficient with the Nasdaq 100 falling below 0.50, levels that haven’t been seen since January, raising the question whether drubbed-down cryptocurrencies are closer to a bottom than stocks and poised for a recovery should financial conditions ease.

Much will depend on the U.S. Federal Reserve and its response to the fastest pace of inflation in over four decades.

Earlier this week, the U.S. Labor Department reported white-hot headline inflation of 9.1%, the highest rate of price increases in over four decades and ratcheting up pressure on the U.S. Federal Reserve to act decisively to rein in inflation.

Markets are bracing for a Fed rate hike of anywhere between 0.75% to a whole 1%, the sharpest interest rate hike since the Fed started using interest rates to institute monetary policy in the 1990s.

But with a yield curve inversion, there remains the outside possibility that cryptocurrencies, and in particular Bitcoin, may have already found a bottom.

Unlike equities and commodities which are susceptible to more established methods of evaluation and assessment, cryptocurrencies are driven strongly by narrative, and as prices start to stabilize, there could be some investors tempted to put a portion of their portfolio to position for growth once financial conditions ease.

With the risk that the U.S. could be pushed into a recession by a rapidly tightening Fed, the breakdown of the correlation between Bitcoin and the Nasdaq 100 could be telling.

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