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Decoupled: Analyzing Bitcoin Diverging Away From the Stock Market

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Bitcoin price this week surged by over $1,000 in a single day, taking the cryptocurrency hurdling toward 2019 highs. At the same time, the stock market that’s traded lock and step with the crypto asset all throughout 2020, dropped hard. The phenomenon is something top crypto analysts had called for, who now expect Bitcoin to break out into a bull market.

But before crypto investors get their hopes up too quickly, here’s a deep dive into the possible decoupling of the stock market and Bitcoin correlation, and what that might mean for both asset classes.

Crypto Correlation With The S&P 500 Diverges, Is The Decoupling Here?

Last week, Bitcoin took the world of finance by storm, when it exploded by over $1,000 in a single day, taking out 2020 highs and targeting last year’s peak. And while the move itself was enough to cause plenty of chatter, much of the discussion was centered around the cryptocurrency’s sudden divergence in correlation with the S&P 500.

RELATED READING | ALWAYS ON: BITCOIN TO SURPASS S&P 500 TRADING TIME WITHIN TWO YEARS

Starting ahead of Black Thursday, the crypto market and stock market topped out in early 2020, then suffered a catastrophic collapse. Bitcoin dropped well over 50% in 24 hours, and the stock market saw its worst quarterly close on record just after setting an all-time high.

The leading cryptocurrency by market cap possibly decouples the ongoing stock market correlation | Source: BTCUSD on TradingView.com

The correlation has remained since after years of acting as an uncorrelation or anti-correlated asset, until now. The latest rally in Bitcoin took place while the stock market began to stumble. The two vastly different asset classes have only continued to diverge, with crypto getting stronger and major stock indices getting weaker.

Analysts had been calling for such a scenario to take place, pointing to ongoing Bitcoin adoption and network effect as the driver behind the divergence. For example, daily active BTC addresses have grown considerably, along with non-zero BTC addresses. More Bitcoin is also being moved off exchanges, so there’s less to be sold into the market. But is it far too soon to be calling it quits on the correlation?

bitcoin spx decoulping btc

But are analysts jumping the gun that the correlation has ended?  | Source: BTCUSD on TradingView.com

Can A Bitcoin Bull Market Begin, While The Stock Market Tops?

Unfortunately for hopeful crypto investors, this isn’t the first time since the correlation began where Bitcoin diverged, but ultimately the two caught up with one another somehow. In past instances, Bitcoin price has led the S&P 500 in moving up.

RELATED READING | BITCOIN SETS NEW ALL-TIME HIGH IN THESE GLOBAL CURRENCIES

The divergence can last up to an entire month before the S&P 500 catches up. If the leading cryptocurrency is now a leading indicator for the stock market, it appears to suggest a rally in stocks is less than three weeks away.

bitcoin spx decoulping btc

What exactly does this sudden and unusual correlation mean for crypto?  | Source: BTCUSD on TradingView.com

Another scenario is possible, however. Few stock market analysts exist that don’t claim the asset class is in a bubble that is nearing a burst. If and when it happens, the stock market could enter its first ongoing bear market in over 90 years. And if that’s the case, can Bitcoin really begin a new bull run?

It is possible, and given Bitcoin’s infrequency history tracing this closely, shaking off the correlation and decoupling could be here. But if the uncanny correlation continues, a bubble bursting in stocks could send Bitcoin and cryptocurrency back into a bear market.

Featured image from Deposit Photos, Charts from TradingView.com



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Bitcoin

Bitcoin may lose $30K price level if stocks tank, analysts warn

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The ghost of stock market crash is back again to haunt Bitcoin (BTC).

It happened last in March 2020. Back then, the prospect of the fast-spreading coronavirus pandemic led to lockdowns across developed and emerging economies. In turn, global stocks crashed in tandem, and Bitcoin lost half of its value in just two days.

Meanwhile, the U.S .dollar index, or DXY, which represents the greenback’s strength against a basket of top foreign currencies, has now climbed by 8.78% to 102.992, its highest level since January 2017.

The huge inverse correlation showed that investors dumped their stocks and Bitcoin holdings and sought safety in what they thought was a better haven: the greenback. 

More than a year later, Bitcoin and stock markets again wrestle with a similar bearish sentiment, this time led by a renewed demand for the U.S. dollar following the Federal Reserve’s hawkish tone.

Namely, the U.S. central bank announced Wednesday it will start hiking its benchmark interest rates by the end of 2023, a year earlier than planned.

Lower interest rates helped to pull Bitcoin and the U.S. stock market out of their bearish slumber. The benchmark cryptocurrency jumped from $3,858 in March 2020 to almost $65,000 in April 2021 as the Fed pushed lending rates to the 0%-0.25% range.

Meanwhile, the S&P 500 index rose more than 95% to 4,257.16 from its mid-March 2020 peak. Dow Jones and Nasdaq rallied similarly, as shown in the chart below.

Bitcoin, Nasdaq Composite, S&P 500, and Dow Jones rose in sync after March 2020 crash. Source: TradingView.com

And this is what happened after the Federal Reserve’s rate-hike announcement on Wednesday…

Bitcoin and the US stock market plunged after the Fed’s rate hike update. Source: TradingView.com

Meanwhile, the U.S. dollar index jumped to its two-month high, hinting at a renewed appetite for the greenback in global markets.

U.S. dollar index jumped up to 2.06% after rate hike announcement. Source: TradingView.com

Popular on-chain analyst Willy Woo said on Friday that a stock market crash coupled with a rising dollar could increase Bitcoin’s bearish outlook. 

“Some downside risk if stonks tank, a lot of rallying in the DXY (USD strength) which is typical of money moving to safety,” he explained. 

Michael Burry, the head of Scion Asset Management, also sounded the alarm on an imminent Bitcoin and stock market crash, adding that when crypto markets fall from trillions, or when meme stocks fall from billions, the Main Street losses will approach the size of countries.

“The problem with crypto, as in most things, is the leverage,” he tweeted. “If you don’t know how much leverage is in crypto, you don’t know anything about crypto.”

Burry deleted his tweets later.

Some bullish hopes

Away from the price action, Bitcoin’s adoption continues to grow, an upside catalyst that was missing during the March 2020 crash.

On Friday, CNBC reported that Goldman Sachs has started trading Bitcoin Futures with Galaxy Digital, a crypto merchant bank headed by former hedge fund tycoon Mike Novogratz. The financial news service claimed that Goldman’s call to hire Galaxy as its liquidity provider came in response to increasing pressure from its wealthy clients.

Related: Hawkish Fed comments push Bitcoin price and stocks lower again

Damien Vanderwilt, co-president of Galaxy Digital, added that the mainstream adoption would help Bitcoin lower its infamous price volatility, paving the way for institutional players to join the crypto bandwagon. Excerpts from his interview with CNBC:

“Once one bank is out there doing this, the other banks will have [fear of missing out] and they’ll get on-boarded because their clients have been asking for it.”

Earlier, other major financial and banking services, including Morgan Stanley, PayPal, and Bank of New York Mellon, also launched crypto-enabled services for their clients.

Is Bitcoin in a bear market? 

Referring to the question “are we in a bear market?” Woo said that Bitcoin adoption continues to look healthy despite the recent price drop. The analyst cited on-chain indicators to show an increasing user growth and capital injection in the Bitcoin market.

He also noted that the recent Bitcoin sell-off merely transported BTC from weak hands to strong hands. 

7-day moving average of coins moving between strong and weak hands. Source: Willy Woo

Woo reminded:

“My only concern for downside risk is if we get a major correction in equities which will pull BTC price downwards no matter what the on-chain fundamentals may suggest. Noticing USD strength on the DXY, which suggest some investors moving to safety in the USD.”