Bitcoin breaks away from stocks in 50% surge that defies macro danger

by James · February 21, 2023

(Bloomberg) — Worries about further interest rate hikes, a blistering stock rally and a U.S. crypto crash suggest Bitcoin and other tokens should make a hasty retreat. Instead, they extend their 2023 rebound.

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Bitcoins so far this year have reached 50% after a further jump in February, contrasting with a decline in global stocks this month thanks to a macroeconomic environment filled with growth and inflation concerns.

This divergence has reduced a positive correlation between stocks and crypto that sprouted in the pandemic. A 40-day correlation between Bitcoin and the S&P 500 has fallen below 0.3 to its lowest since 2021 from a May record above 0.8. A reading of 1 means assets are swinging in lockstep and minus 1 means the opposite.

Other conditions have also changed: A once deeply negative 40-day correlation between Bitcoin and a dollar gauge is quickly disappearing, while January’s tight bond between Treasuries and the biggest digital asset has disappeared.

“Crypto has decoupled from traditional assets by 2023” and “crypto-specific events are increasingly driving the market,” digital asset research firm Kaiko wrote in a note.

A range of assets including digital tokens rallied in January, but the risk rally outside of crypto broke this month as data including strong US jobs numbers dashed hopes of an imminent peak in borrowing costs.

Crypto outperforms traditional assets as a result. The S&P 500 has returned a little over 6% this year, the Nasdaq 100 nearly 13% and gold around 1%. MVIS CryptoCompare Digital Assets 100 index of leading tokens is up 40%.

Some commentators argue that endogenous drivers in the digital asset industry influence speculative bets on tokens. Hong Kong, for example, sparked optimism by swinging in October to a pro-crypto stance and on Monday outlined a plan to allow retail investors to trade major coins.

Adam Farthing, an analyst at crypto market maker B2C2, said 59% of flows from the Asia-Pacific region were buyers, compared with 55% in Europe and the Middle East and little selling pressure from the US, where regulators have turned up the heat. on the sector in the wake of the collapse of the FTX exchange.

Another crypto topic is the next upgrade of the Ethereum blockchain – the biggest commercial highway in the virtual asset industry. The so-called Shanghai upgrade will allow investors to withdraw Ether coins they had unlocked to help run the network in return for rewards, a process called staking.

Smaller tokens from applications trying to make it easier to exploit stake rewards have proliferated. Examples include Lido DAO and Rocket Pool’s RPL, which are up 200% and 150% respectively in 2023, according to data from CoinGecko.

Innovation “will allow crypto to disconnect from traditional markets,” said David Moreno Darocas, head of research at market intelligence firm CryptoCompare.

So-called halving events – fixed intervals where the rewards paid to crypto miners are reduced by 50%, reducing the new supply of tokens – are also rippling through the digital asset markets. The Litecoin token’s halving is happening in the coming months, and it has increased by around 35% this year. Bitcoin’s halving is expected in 2024.

‘Sector-specific’ factors

“Unless there is a significant escalation in macro volatility, we expect crypto to revert to being driven by sector-specific factors,” said Richard Galvin, co-founder of fund manager Digital Asset Capital Management.

Crypto correlations can turn on a dime, and some argue that Bitcoin has surfed a short squeeze and is vulnerable to rising prices. Higher borrowing costs and a series of explosions reduced the market value of digital tokens by $1.5 trillion last year.

Many investors remain wary, but those interested are coming from the sidelines and appear to be “buying for price appreciation and diversification,” said Alkesh Shah, head of crypto research at Bank of America Corp.

Demand from retail investors is helping, JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou added.

“This positive retail momentum so far this year is naturally more dominant in crypto given the absence of institutional investors at the moment” after FTX, he said.

Bitcoin was little changed at around $24,825 at 9:42 a.m. in London on Tuesday. Smaller tokens such as Ether and Dogecoin also posted relatively small moves.

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