As Bitcoin’s price soared above $26,000 on Tuesday, crypto traders were quick to argue that the recent uptick in digital asset prices represented a significant shift in momentum.
Crypto Twitter is filled with examples of users claiming that the rise in Bitcoin’s price is evidence of digital assets diverging from other risky assets like stocks, with some calling it “The Great Decoupling.”
For much of last year, digital assets and stocks have traded in similar directions, amid an economic slowdown and tighter monetary conditions spurred by an aggressive series of rate hikes by the Federal Reserve.
Even if crypto gains ahead in the short term, it is too early to say that the asset class correlation has been broken given the fact that the Fed’s monetary policy stance remains a major player in today’s markets, says Wave Financial’s CEO. Nauman Sheikh narrated Decrypt.
“I wouldn’t say the correlation has broken down,” he said. “[Traders are] focused on the idea of disconnection because they are all looking for a reason for the space to come together.”
Although Bitcoin is up 56% since the start of this year compared to a 9.6% rise in the Nasdaq Composite and a 2% rise in the S&P 500, the correlation between crypto and stocks is still palpable.
“I’d say it’s still too early, as I expect all risk assets to basically move in step if the Fed swings,” said IntoTheBlock’s research director Lucas Outumuro Decrypt. “But a few weeks later, it may start to become less correlated as the biggest macro headwind subsides.”
According to IntoTheBlock’s correlation matrix, Bitcoin’s correlation to the Nasdaq and S&P 500 has actually increased over the past week, from -0.23 and -0.28 to 0.24 and 0.33, respectively.
Correlations are often calculated in a way where a value of 1 indicates that two things always move in the same direction, and a value of -1 means the opposite.
Although Bitcoin’s correlation to the S&P 500 and Nasdaq remains positive, the measure has declined since January 31, when Bitcoin’s correlation to the S&P 500 was 0.85 and 0.92 to the Nasdaq.
Outumuro said the recent surge in digital asset prices is based in part on events such as an inflation report released Tuesday and the prospect of the Fed potentially pausing interest rate hikes following the collapse of Silicon Valley Bank last week — events that also favored stocks.
“Big news events like the CPI print have been mirrored in both asset classes,” he said. “Crypto being further out on the risk curve is an advantage [it] disproportionate.”
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