Stocks Down, Bitcoin Up – Will This Time Be Different?

Bitcoin surpassed $35,000 on Wednesday amid growing enthusiasm for bitcoin ETFs. And while analysts see that as the main force pulling cryptocurrency forward, stocks on Wall Street seem relatively lukewarm.

“You can't attribute Monday's race to anything else,” K33 senior analyst Vettel Lunde said. Decrypt. “The market is reacting to the increased likelihood of spot ETF approvals, albeit with delayed effects.”

Bitcoin is up 24% in the past week, according to CoinGecko. Meanwhile, the S&P 500 is down 2.5% over the past five trading days, and the tech-heavy Nasdaq Composite is down 3.3% over the same period.

An ETF is a publicly traded investment vehicle that tracks the value of assets. As for Bitcoin, Lunde said it has “huge potential for revenue streams” because institutions and retailers will have an easier time gaining exposure to the coin.

Bitcoin's correlation to stocks has been declining over the past year, but the coin has moved in line with stocks for much of 2022, according to K33 Research. Before the recent surge, bitcoin's correlation to stocks was already softening significantly, Lunde said.

“The story of the relationship has changed a lot in the last year, and that's something that needs to be recognized by market participants,” he said. “But it takes time.”

Bitcoin's correlation with the Nasdaq and S&P 500 dropped from 0.79 and 0.82 last May to 0.20 and 0.16 respectively. A value of 1 indicates that two objects always move in the same direction, and a value of -1 means the opposite.

As the Federal Reserve raises borrowing costs in 2022 to tackle the highest levels of inflation in decades, both stocks and crypto have come under pressure. But it was for two different reasons, said James Butterfill, head of research at CoinShares Decrypt.

While rising borrowing costs have squeezed the margins of publicly traded companies and made them unattractive, Butterfill said a simultaneous rise in yields on assets like US Treasuries has given Bitcoin stiff competition as a store of value.

At this point, Butterfill says a strong correlation is emerging between stocks and bonds. As a relatively uncorrelated asset, Bitcoin is gaining interest among some investors—like CoinShares clients—as an asset that can offer diversification.

By raising interest rates, the Fed makes it more expensive for businesses and consumers to borrow, thereby slowing the economy. But if they are too aggressive, heavy borrowing costs can cripple the economy.

Last week, expectations that the Fed would raise interest rates in December fell, according to CME Group. Fed Watch Tool. And if the Fed announces that it is ready to cut them soon, the gap between Bitcoin and stocks will become stronger, Butterfill said.

“Stock markets can react badly to a rate cut because we're about to fall into a recession. “Similarly, an admission by the Fed that they made a mistake is good for Bitcoin.”