Crypto’s correlation with mainstream finance may bleed more soon

There is no denying the fact that the crypto market has been faced with an obscene amount of bearish pressure over the past eight odd months. Despite this, September has been particularly turbulent for the industry, with the price of Bitcoin (BTC) falling below the all-important psychological threshold of $20,000 before a comeback.

While these falls have called into question the asset’s status as digital gold and a hedge against inflation, a key question worth examining is how deeply intertwined the crypto market is with the global economy.

To this point, historical inflation rates have driven the price of everything under the sun – from fuel to food – to record highs. And despite the fact that the S&P 500, a stock market index that tracks the performance of 500 major US-listed companies, is down year-to-date (YTD), its performance has outperformed the crypto market by a decent margin.

Charmyn Ho, Head of Crypto Insights for cryptocurrency exchange Bybit, pointed out to Cointelegraph that just like any other market, the crypto industry is currently subject to volatility caused by macroeconomic factors, adding:

“It is definitely fair to say that the global financial landscape has put a strain on Bitcoin’s prices. With continued liquidity pressures due to quantitative tightening and uncertainty, investors tend to shy away from risk assets, which in turn limits any upside momentum for the crypto market.”

On the recent recovery above $20,000, Ho noted that whether this is a trend reversal – after a recent confluence of chain values ​​suggested a bottom formation – or just a temporary attempt to flush out excessive leverage is still too early to tell. Reflecting on historical data, she believes that the extended duration of BTC’s current resting state could indicate the formation of a reliable price floor, which could help pave the way for the next bull trend.

Is crypto’s link with the global economy now inextricable?

Ajay Dhingra, head of research and analysis at crypto exchange Unizen, told Cointelegraph that rising inflation has dramatically reduced the risk appetite of crypto investors and weakened the global economy to the point where Bitcoin has been unable to live up to its promise of a safe haven. against inflation. This is largely due to its high correlation with the stock market and unpalatable volatility.

He added that while the future remains as promising as ever for blockchain technology, due to the crypto market’s deeper connection with the broader economy, there could be even more pain for investors in the short term. Noting that it is always consumer sentiment that dictates any market, Dhingra added:

“Right now the world is going through a massive crisis due to the war in Ukraine, rising prices and weak economic activity, which has irritated the retail trade. But in the long run, the innovation brought about by blockchain technology will inevitably break the correlation.”

In Ho’s opinion, the existing correlation is likely to persist. However, it is difficult to predict the extent since the recent downturn in the economy has had implications of unimaginable proportions on investors and traders worldwide.

Similarly, she pointed out that prevailing macroeconomic conditions have taken an unprecedented toll on market sentiment for risk-on and risk-off investments as well, adding that if the economy sees a further slowdown, investors across the board will continue to shed assets like crypto and move towards fiat-centric offerings like government bonds. She added:

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“I think that as cryptocurrencies become more widely accepted, links between traditional finance and the crypto-economy can definitely be drawn. However, these two still maintain a kind of independence from each other as they have very different functions and uses.”

Frederic Fernandez, co-founder of DEXTools – a blockchain data aggregation platform – believes that although economic conditions across different markets affect Bitcoin quite strongly, when the dust finally settles, not only people will understand the benefits of crypto as a refuge from the traditional financial sector, but the market otherwise could see a solid upward trend. He added:

“Major players are now also interested in crypto and are building their future portfolios, they are exploiting this market to create good strategies for their funds and clients, but it will take time to see the consequences when the market will become more mature.”

What is happening now for the crypto market?

Despite Bitcoin’s rally in recent days, many analysts believe it is highly unlikely that the currency – as well as the crypto market at large – will be able to muster the kind of momentum it needs to move past this dull phase when preferably. in the foreseeable future.

For example, Akeel Qureshi, head of marketing for decentralized finance (DeFi) protocol Hubble Protocol, told Cointelegraph, “According to Bitcoin maxis, this is the environment where the asset was meant to thrive. Although that theory was formulated long before players like JPMorgan bought in, so far there doesn’t seem to be much good news on the horizon,” adding:

“Bitcoin is tied to the politics of the Federal Reserve.”

He noted that while Bitcoin has long been touted as an inflation-proof asset — a narrative that still holds true depending on when one bought the token — it is currently witnessing falling prices, especially as the job market continues to weaken.

However, Qureshi stated that not all cryptocurrency prices are as inextricably linked to the global economy as Bitcoin. He believes that Ether (ETH) has already started to pull away from BTC ahead of the long-awaited merger into a proof-of-stake consensus model, which is due to take place next week, adding:

“This potentially heralds the so-called ‘flipping’, where growth in ETH begins to outpace that of Bitcoin. Meanwhile, active traders are finding great opportunities among altcoins and smaller cryptocurrencies on the wide variety of blockchains and decentralized networks that now exist.”

Finally, he noted that the stablecoin market remains incredibly strong regardless of rising interest rates because it is still impossible to find a bank that is able to provide an interest rate on cash that is higher than the prevailing inflation. “In decentralized finance, this is possible on US dollar-backed stablecoins. As such, for those willing to explore, crypto has limitless possibilities.”

Could a trend reversal be possible for BTC?

According to some analysts, the recent decline in crypto prices has not been spurred by rising inflation, but by rising interest rates that have been raised to help remove excess liquidity in the market, keep inflation down and strengthen the US dollar. Higher interest rates also correspond to better government interest rates and increased investment from foreign bond buyers. Therefore, a trend reversal in the short term may be difficult, although not impossible.

That said, over the past decade, Bitcoin has largely outperformed most stocks while gaining mainstream acceptance by many entities in traditional finance. Investment giant BlackRock recently started pumping client money into the digital asset, suggesting a potential rise in crypto’s future. It is also worth noting that the last time BTC fell below $10,000, it quickly continued to scale to an all-time high of $69,000.

Finally, some experts believe that Bitcoin may soon continue to lose its strong correlation with the stock market, highlighting that over the past 14-day stretch, people have sold the S&P 500 while BTC has gained nearly 10% in value. Another thing that seems to favor Bitcoin is that major fiat assets such as the Euro, the British Pound and the Japanese Yen are at record lows compared to the US Dollar.

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On this point, Ben Caselin, vice president of global marketing and communications for cryptocurrency exchange AAX, told Forbes that there is currently a very strong relationship between the US dollar’s price action and Bitcoin, adding that while the dollar has shown decent strength over Q2 2022, any withdrawals could spur a short-term rally for Bitcoin.

As we move into a future fueled by financial uncertainty, it will be interesting to see how things play out for the crypto market, especially as there appears to be little respite from the traditional financial front anytime soon.