Bitcoin’s Correlation to US Stocks Is Fading – Why That Could Be a Good Thing for BTC Price

The positive correlation between the Bitcoin price and US stock prices, which reached a record high in 2022, is fading. Bitcoin bulls will hope that this disconnect bodes well for Bitcoin, given that it could mean that the US stock market’s ongoing struggles could be less of a headwind for the world’s largest cryptocurrency.

According to a chart presented by CoinMetrics, the 60-day Pearson correlation between the BTC price and the closing price of the S&P 500, the most followed US stock market benchmark, fell to its lowest level since April 2022 at 0.30 earlier this week.

The correlation had hit an all-time high of 0.667 in September 2022, after rising sharply earlier in the year as crypto and stock prices rallied in unison amid concerns of a stronger-than-expected rise in US inflationary pressures and the resulting tightening response from the US Federal Reserve.

The fall in the correlation between the two asset classes comes in the wake of crypto’s impressive rally since the start of the year. Bitcoin was last up around 35% on the year, while the S&P 500 is up a far more modest 4.0%.

Could a lower correlation to stocks mean the bear market is over?

Bitcoin’s heightened correlation to US equity markets in the latter half of 2022 was a clear feature of the ongoing bear market that, at November lows, had seen BTC pull as much as 77% lower from its 2021 record highs of $69,000.

Before then, the 60-day Pearson correlation between Bitcoin and the S&P 500 had only been as high as 0.3 on a few occasions, and would often fall below zero. The few years until 2022 when Bitcoin’s correlation to US stocks was much weaker were marked by significant price gains.

Bitcoin rallied over 2,000% from its 2018 lows just above $3,000 to its record highs in 2021. Bulls will hope that a lower correlation between Bitcoin and stocks, as was the case in the late 2018 to late 2021 period, ends up being a feature of an upcoming bull market.

Equity investors fear that the Fed’s aggressive efforts to curb US inflation, currently holding firmer than expected with the US economy beating expectations, will result in a deeper downturn in corporate earnings later in the year, dealing a further blow to stock valuations that have already taken a hit by the higher risk-free rate (ie higher US Treasury yields).

There are therefore almost no bets on a short-term increase in US share prices back towards record high levels. But a weaker correlation could allow Bitcoin to rally this year, despite ongoing pessimism about the outlook for US stocks. However, the BTC price pullback from recent highs above $25,000 has resulted in some on-chain indicators related to Bitcoin market profitability sending a less bullish signal about the outlook for the world’s largest cryptocurrency by market capitalization. Some fear that Bitcoin may be heading back below $20,000 in the near future.