- Bitcoin had deviated slightly from stocks over the last couple of weeks
- Correlation has bounced back since
- Tech-heavy Nasdaq continues to trade in lockstep with Bitcoin as investors in both asset classes look to shifting expectations around interest rates
It’s been an odd few weeks in the market. The banking wobbles over the last few weeks, triggered by the bank run on the crypto-friendly Silicon Valley Bank (SVB), caused everything to go a little wonky.
One of the most curious aspects of this was a deviation from the normal Bitcoin/stocks relationship. Or, sort of. Bitcoin raced upwards while markets digested the banking news, with the correlation – at least on a short-term rolling 30-day metric – dipping as per the below chart.
The chart also shows, however, that the correlation has since come back up.
As I wrote in a deep dive at the time, we have seen these cases of temporarily dipping correlation a few times over the last year, most notably with the FTX crash in November, as well as the Celsius and LUNA crashes before it.
But in each case, the correlation roared back. The above chart shows that it is beginning to do the same again this time. And the chart below shows that no matter what you swing it, the relationship here is pretty close (and forgive the axis crime on this one, please).
What happens next?
The interesting question is what will happen going forward. The key development recently has been with regard to expectations around the future path of interest rates.
The forecasts have been transformed. With hiking interest rates exposing the mismanagement of the aforementioned collapsed banks, the trouble has led to the market forecasting a pullback in plans to hike further.
Instead of future hikes, there are now cuts in the pipeline, or at least according to the probabilities implied by fed futures.
And it was the transition into this new interest rate paradigm, occurring last year as inflation began to roar and it became clear that central banks needed to act, which kicked the correlation up between stocks and Bitcoin.
It is not that one is controlling the other, it is that Jerome Powell is controlling both. Tech stocks are particularly sensitive to interest rates, given the sector is valued so much by discounting future cash flows – and a lack of current profit – which is why the correlation, and bloodbath in 2022, was so strong between Bitcoin and the Nasdaq.
Whether a potential pivot back off this uber-tight monetary policy sparks a deviation in correlation going forward is yet to be seen. Perhaps it will to a certain extent, but at the same time, it remains difficult to come up with a strong argument that Bitcoin is ready to truly deviate.
A decoupling remains the ultimate bull vision for the asset, and perhaps it will get there one day in the future. But there is not much evidence, beyond blind hoping by those in the sector, that this is imminent.
Over a multi-year time horizon into the future? That is anyone’s guess. But if the past couple of years has taught us anything, it is that stocks and Bitcoin are paired at the hip, especially tech stocks. The past couple of weeks, and the resumption of this trend, is actually more of a reminder of this than a proof against the theory.