Bitcoin’s tight correlation with tech stocks muddies Safe Haven narrative
Bitcoin’s price surged 23% in March as several US banks went bankrupt, fueling fears of a recession.
Several analysts have called the move higher a safe haven rally – with the price gain attributed to investors seeking shelter in the top cryptocurrency amid bank failures.
However, Bitcoin rose in line with the Nasdaq to S&P 500 (NDX/SPX) ratio, a sign that the rally was partly, if not mainly, driven by improved risk appetite as a result of hopes of an early central bank (Fed) favor. of liquidity-promoting interest rate cuts.
The NDX/SPX ratio measures the relative difference in valuation between technology stocks represented in the Nasdaq 100 and a basket of broader industrial stocks from the S&P 500.
The ratio rose 5.65% in March, capping its best monthly performance since February 2009, as banking sector volatility led traders to aggressively reinstate bets that the Fed would cut interest rates later this year. The Nasdaq rose nearly 10%, outpacing the S&P 500’s 3.5% gain by a wide margin.
The 90-day correlation coefficient between bitcoin and the NDX/SPX ratio rose from 0.81 to 0.90, signaling the strongest positive relationship between the two assets since June 2022. At press time, the correlation coefficient stood at 0.89. The positive correlation means that on days when the ratio rises, bitcoin is more likely to do the same and vice versa.
“BTC is still trading as a risk asset,” said Noelle Acheson, the author of the popular newsletter Crypto is Macro Now, referring to the positive correlation between bitcoin and the NDX/SPX ratio. “The rising NDX/SPX ratio means tech is doing better, which says risk sentiment is strong.”
Technology stocks tend to be more sensitive to interest rate expectations than the broader market. A rising ratio is therefore often equated with dovish Fed expectations and improved investor risk appetite which often seeps into other assets such as cryptocurrencies, as observed in 2020 and early 2021. A falling ratio represents risk-off sentiment.
“Like crypto, growth-oriented companies that are expected to provide cash flows, or some form of fundamental value, further into the future find their results more strongly affected by changes in interest rates. The Nasdaq 100 index, for example, is made up of mainly growth-style sectors , such as technology, which are more sensitive to rising or falling interest rate expectations,” Gabriel Selby, lead research analyst at CF Benchmarks, told CoinDesk in an email.
Selby added that as the NDX/SPX ratio follows the crypto market closely, it suggests that interest rate expectations are in the driver’s seat and that the price differential between stocks and crypto markets may not be as large as first thought.
The correlation between bitcoin and the NDX/SPX ratio was consistently positive during the 2022 bear market and between May 2020 and March 2021, when the cryptocurrency rose nearly tenfold to $60,000.
If that’s not enough, both have gone into lockdown since the beginning of January. While bitcoin has risen nearly 70% this year, the ratio is up 11.26%.
Bitcoin’s break around $28,000 since March 22 is consistent with the consolidation in the NDX/SPX ratio.
While bitcoin’s short-term outlook appears tied to swings in the NDX/SPX ratio, it could benefit from fears of fiat currency devaluations over time, according to Acheson.
“BTC is still (and always will be) an element of risk for traditional investors. It is also likely to be seen as a safe haven,” Acheson said. “We are likely to see continued accumulation from long-term investors interested in their currency depreciation hedging properties, while short-term moves are dictated by shifting theories of what monetary liquidity will do.”
