Can Bitcoin Break Free of the Stock Market Correlation?

  • Lately, Bitcoin (BTC-USD) has moved in tandem with growth stocks.
  • This could carry on in the short-term.
  • However, in time, this will cease, which may be good news for BTC investors with a long-term horizon.
A concept image with the logo for Wrapped Bitcoin.

Source: Vladimir Kazakov / Shutterstock.com

In recent years, the performance of Bitcoin (BTC-USD) has become increasingly correlated with that of the stock market. Chalk this up to this cryptocurrency’s mainstream adoption. Year-to-date, BTC has essentially been moving in tandem with growth stocks, as measured by the Nasdaq Composite.

Check out this chart here and you’ll see what I mean.  Bitcoin has gone up when growth stocks go up and vice versa. If you’re a “HODLer” of it, or are looking to enter or add to a position, this may be a concern.

That is, you may be worried this crypto, which at around $40,000 per coin has fallen sharply from its all-time high of $67,570.18 per coin, could continue to drop as the factors putting pressure on it since November carry on. Yet, while its short-term performance could remain disappointing, this may not be the case with a long-term timeframe.

BTC-USD Bitcoin USD $40,655

Impact on Short-Term Performance

External factors have been the main reason why Bitcoin, and cryptocurrencies in general, have performed so poorly over the past five months. During this timeframe, as the U.S. Federal Reserve (Fed) has gone from writing off inflation as “transitory,” to taking serious action to tame it via rate hikes, investors have been cycling out of risk-on plays.

In other words, many risk-on plays are assets that performed very well during the near-zero interest rate pandemic era. Tech stocks and crypto have taken a dive. Similar to Bitcoin, which is down around 41.5% from its highs, Ethereum (ETH-USD) is down 38% from its all-time high. Major altcoins, like Solana (SOL-USD), have seen even sharper drops.

Even worse, this asset class may not have even bottomed out just yet. As BitMEX co-founder Arthur Hayes has recently argued, as rising interest rates put more pressure on growth and tech stocks, more pressure could get applied to crypto. In the case of BTC, this may mean it falls back to $30,000 per coin.

In other words, if you thought crypto winter was over, think again. Still fluctuating in line with a major asset class that is falling out of favor, the near-term stands to stay painful.

This High Correlation Could Break

Bitcoin may be moving in line with tech and growth stocks as the Fed reins in runaway inflation with its fiscal tightening measures. But it is not a given that this high correlation will continue from here on out. Down the road, it could break. This is great news for bullish investors with a long-term horizon.

How? First off, institutional buyers continue to provide support, no matter the price. At some point, this will begin to outweigh the stampede of selling by fair weather fans who are getting out due to the looming near-term uncertainties. From there, its trajectory will likely fall back in line with historical trading patterns. What are its historical trading patterns?

As a Seeking Alpha commentator recently detailed, since its creation, Bitcoin has moved in accordance with its four-year halving cycle. Per his analysis, the commentator believes BTC will bottom out in January 2023. After that, it stands to go on another tremendous run as the rest of its halving cycle plays out.

In short, after its sudden run-up in popularity from late 2020 through late 2021, things can revert back as these short-sighted market participants return to the sidelines.

The Verdict: A Buy on Further Weakness

Admittedly, it is far from guaranteed the full argument made by the aforementioned commentator will play out. For instance, we may not be just a few years away from BTC hitting $400,000 per coin. Much less, hitting $1 million per coin by 2030.

Still, that doesn’t mean we should throw out his argument entirely. The fact that institutional buyers continue to gobble up coins as skittish investors flee points to things playing out largely as predicted by this take.

Again, that is bad news for anyone looking to trade it in the short-term, but it is a promising prospect for those sticking to the “HODLer” strategy. So, what’s the takeaway here, in terms of how to buy or sell this established cryptocurrency?

Given that its correlation with growth stocks hasn’t broken just yet, it may be too early to initiate or add to a position. However, in the months ahead, assuming growth stocks continue to correct, sending Bitcoin lower while at the same time it breaks free of said correlation, a great opportunity to buy may emerge.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2022/04/can-bitcoin-break-free-of-stock-market-correlation-yes/.

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