Bitcoin has climbed more than 10% this week, outperforming stocks

Cryptocurrencies rallied this week, even as US stocks briefly retreated from their New Year’s rally and a major crypto lender filed for long-awaited bankruptcy.

Bitcoin was last higher by about 12% for the week, according to Coin Metrics, while ether has risen 14%.

By comparison, two of the three major stock averages were on track to post a losing week, which has been shortened for the Martin Luther King holiday. The S&P 500 and Doe Jones Industrial Average were last down 0.9% and 2.9%, respectively, for the week. However, the Nasdaq Composite has been the best performer. It is up slightly for the week and has risen 5% for the year, leading the other major indices.

Bitcoin and ether rose 2.73% and 2.15% respectively in the same four-day period.

“Bitcoin appears to be trading in tandem with the Nasdaq and risk assets again, after the past few months of disconnect,” said Sylvia Jablonski, managing director and chief investment officer at Defiance ETFs. “This is good news for crypto investors in that if inflation falls, and the Fed is closer to the end than the beginning of economic tightening, risk assets will take a breather and perhaps lure investors back in.”

Bitcoin traded in lockstep with stocks throughout most of 2022 as institutional investors entered the crypto market the year before, and government stimulus and Federal Reserve monetary policy tightening became the biggest price drivers.

In the later part of the year, however, this correlation diminished and bitcoin’s price remained relatively stable amid a wave of scandals and bankruptcies in the crypto industry and a general loss of confidence in the asset class.

Jablonski said bitcoin has benefited from performance breakouts this week as short-term sentiment favored Nasdaq stocks. Whether that holds depends on the Fed’s continued tightening path, and whether or not the economy is pushed into a recession, she added.

This week’s rise in crypto prices also comes amid the latest blow to the industry: Genesis one of the largest lenders in crypto and one of FTX’s largest unsecured creditors filed for bankruptcy late Thursday night.

Owen Lau, an analyst at Oppenheimer, said the crypto rally this week was an extension of the rally in risk assets that took place during the first two weeks of the year.

“Bitcoin and digital asset stocks were oversold last year,” he said. “These assets have more than priced in the negative news from the FTX collapse, BlockFi bankruptcy and Genesis fallout.”

Investors and others are still wondering what potential second- and third-order effects could come from the recent explosions.

However, Defiance’s Jablonski warned that if there are more similar explosions in crypto, digital assets may not only be disconnected from trading as a risky asset, but start trading instead as an “unwanted asset that causes investors to panic.”