Bitcoin and S&P 500 Correlation Turns Negative
In recent days, the largest traditional stock market index, the S&P 500 (SPX), has stopped positively correlating with Bitcoin (BTC).
This situation occurred for the first time since the FTX collapse in November 2022 and for the second time in the last 14 months. Does this mean that Bitcoin can once again be seen as a hedge against inflation?
Unfulfilled promise
The narrative that Bitcoin is such a hedge became popular before inflation became a global concern. It was expected that in a situation of uncontrolled fiat money printing, BTC and other significant cryptocurrencies would respond with increases or at least maintain their value. This will be indicated by the logic of supply and demand and the crypto-guaranteed inability to “print” Bitcoin.
However, the rise in inflation in most global economies in 2022 coincided with a cryptocurrency bear market. There are claims that it reached a peak in the inflation of national currencies not seen for 40 years. Which led to a deeper decline in cryptocurrencies and other risk assets. In the US, CPI peaked at 9.1% in June 2022. While in the EU, it reached 10.6% in October 2022.
High inflation triggered a natural reaction to quantitative easing policies. Including a decrease in liquidity and money supply, and an increase in interest rates. The biggest winner was the US dollar index (DXY), which started its bull market in June 2021. Risky assets – such as indices of exchange-traded companies and cryptocurrencies – went south.
So it seems that Bitcoin has not lived up to the hopes of it. Therefore, in a moment of trial, he succumbed to the iron rules of the financial markets and the slogan: “Cash is king.” However, there is a glimmer of hope for cryptocurrency maximalists. If it turned out that Bitcoin could behave differently from traditional assets (symbolized by the SPX index), lose correlation to them and go its own way, then perhaps the inflation hedge narrative would find a second life.
BTC Loses Correlation With SPX
In recent days, an interesting and rare phenomenon has appeared on the correlation chart between Bitcoin and the S&P 500. It was pointed out by a well-known chain analyst @WClementeIII. Clemente wrote that for the first time since the FTX collapse, the daily correlation has turned negative:
A closer look at the daily charts of BTC, SPX and their correlation (blue) shows that for the vast majority of 2022, the assets remained in a strong positive correlation. Excluding the November 2022 FTX crash, the last time the correlation was negative was December 2021 (orange line).
Moreover, the FTX crash led to a sharp fall in the cryptocurrency market. As well as a fall in the Bitcoin price (red area). In contrast, the SPX continued its upward movement (green area). Therefore, the previous loss of correlation played out to BTC’s disadvantage.
SPX Correction a Bullish Signal for Bitcoin?
However, the current loss of correlation may lead to the opposite effect. Recently, the SPX recorded its first higher peak in months and broke through resistance at $4,100. However, this bullish event was followed by a correction and a decline to the current level near $4000.
Cryptocurrency Analyst @24KCrypto tweeted his SPX price prediction today. In his opinion, the index needs to complete a structure with a flat ABC correction with a bottom in the $3800 area. Only after this level is validated, he believes, will an impulsive upward movement begin.
If this happens, and Bitcoin maintains a negative correlation with the SPX, the coming weeks could be bullish for the largest cryptocurrency. In such a situation, BTC will not only disconnect from the traditional stock market, but will also have a chance to recapture investors’ valuation as a hedge against inflation.
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