Bitcoin’s correlation with stocks is at its lowest since 2021 as investors grapple with the cryptocurrency’s narrative shift
by James · March 30, 2023
Bitcoin has climbed steadily in March and is about to post its third consecutive positive month, but the narrative has been on a wild ride in recent weeks. The cryptocurrency has spent much of the past two years trading in lockstep with stocks, but that trend has broken apart since early 2023. The break became more noticeable in March, as investors rediscovered bitcoin’s appeal as an alternative banking system like regional banking. the crisis unfolded. Bitcoin’s correlation with the S&P 500 is now at its lowest since September 2021, after hitting an all-time high in 2022, according to Coin Metrics. Meanwhile, bitcoin’s correlation with gold, a traditionally “risk-off” asset, has risen. “Investors are starting to look at bitcoin as a hedge against the ongoing banking crisis and as a hard asset in this period of high inflation,” said Sam Callahan, an analyst at bitcoin service provider Swan Bitcoin. “Bitcoin’s value proposition is fundamentally different in that it is driven by the network effect and scarcity rather than, say, income growth with stocks. This break in the correlation is perhaps a sign that more investors are waking up to this fact.” Bitcoin became more of an institutional asset in early 2021 as large investors, short-term traders and macro funds jumped into the market. Government stimulus, Fed monetary policy tightening and other economic concerns that drive the sentiment of these types of investors have also driven bitcoin prices up and down since then. However, the long-term task never completely disappeared. “This correlation data shows that, at least recently, bitcoin has actually performed more as a safe haven than a risk asset,” Alex Thorn, head of firm research at Galaxy Digital, said in a recent note. “Given the nature of the current crisis – where the core limitations of the fractional reserve banking system are being tested – bitcoin’s fundamental characteristics genuinely set it apart and, when custody or self-custody is done right, can offer a safe haven in a storm.” On top of that, bitcoin’s price has remained sensitive to inflation and interest rate hikes by the Federal Reserve. This despite greater than usual reactions to regulatory breaches on the largest crypto exchanges. The Securities and Exchange Commission took enforcement action against Kraken and Coinbase, and the Commodity Futures Trading Commission announced a lawsuit against Binance. However, that could change if the Fed’s campaign of inflation-fighting rate hikes ends, said Marc Arjoon, crypto research analyst at CoinShares. “As the Fed nears the end of its hiking regime, the major macro factors affecting the various asset classes — bonds, stocks, real estate and crypto — will begin to slow down,” he said. Traders now expect the Fed to keep its benchmark rate at current levels, with some forecasting lower rates as early as July, according to CME Group’s FedWatch tool. These cuts could amount to as much as a full percentage point by the end of the year, it shows. “As stocks face risks to earnings and GDP recession, bitcoin will not have the same headwinds,” Arjoon added. “This and the obvious cracks in the financial system are why we’ve seen a divergence in returns over the past three months. If and when the Fed eventually swings whether it comes later this year or next year, this will be a boost for crypto more. so that it would lead to an environment with less risk.”
