Have we ever seen a closer correlation between Nasdaq and the equity market? And what does that mean to investors? Where do we foresee the Bitcoin price performance is heading? Our expert Idan Velleman has been investing in crypto since 2015. Let’s ask him what this correlation is all about.
Idan, have we ever seen a closer correlation between the Nasdaq and the entire equity market?
“Well. We know that at the end of 2017, Bitcoin and Nasdaq reached a high correlation. After that, there was a period with a low correlation. However, since the pandemic began the fed dropped the rates and the inflation remained very low. And thus, this correlation increased significantly again.
In the graph below, we see the correlation between the Bitcoin chart and the Nasdaq Index performance.”
What does it mean?
“We know that when the inflation is high, and the fed raises the interest rate, tech (growth) stocks’ prices suffer as those companies are usually having long-term loans, which are getting more expensive. As long as the correlation sustains in a high inflation environment, crypto assets will not do well as well and this was exactly the case since November last year. Also, higher inflation – a higher rate usually means a strong dollar and we also see a correlation between a strong dollar and a weak Bitcoin.
This can mean that crypto assets and particularly Bitcoin performance are in the hand of the Fed and it may indicate how aggressive they plan to raise rates in the upcoming months.”
So, considering the monetary developments in the US and Europe and the geopolitical situation, what do you expect of the Bitcoin price performance in the next months?
“It is very often more about the narrative that the market is building. In the past, Bitcoin was seen as ‘the digital gold’ or a ‘safe haven’, and some investors were fleeing the equity market and instead move to assets such as gold and Bitcoin. If this narrative will be back, we may see a decorrelation between the equity market and Bitcoin. Under the surface, we already see an acceleration of Bitcoin accumulation by whales and if the demand continues and the dollar continues to lose its value, we may experience a change in narrative and decorrelation between Bitocin and the equity market.
It is not clear when we will see this transition, but with high inflation, the short-term Bitcoin accumulation, as well as the growing adaption of the lighting network, Bitcoin is seen as a better alternative payment method. And then it helps that it is of course an approved Bitcoin ETF in the US. All of those factors may decouple the correlation and help the Bitcoin price to go higher in the coming period.
William Clemente, the lead insights analyst at mining firm Blockware, specifically gave their relationship less than a year to play out. He states:
“Going to go on the record and say that I think we see a decorrelation between Bitcoin and stocks in the next 12 months once this transfer of supply is complete,”
“If/when this occurs, it would be quite reflexive and powerful.”
Clemente was referring to what he sees as the transfer of BTC “from correlation trading traditional finance entities to crypto natives, high net worth individuals and forward-looking institutions.”
“This boring sideways range is an equilibrium of this transfer IMO,” he added in a tweet from April 18.
Conclusion
“Bitcoin has really bound itself to the Nasdaq in terms of correlation in the last weeks, and if the US federal reserve keeps hiking interest rates and if the market believes it is going to hike rates, Nasdaq suffers in the short term as well as Bitcoin and the entire crypto market. This trend may continue if we go into a recession, and I expect the major cryptocurrencies to follow the broader market on a short-to-medium term basis, on the upside and downside. However, during an extended recession period and if inflation remains high, the Bitcoin narrative may be changing and more people will view Bitcoin as a safe haven for the long term may move the entire crypto market upwards.”
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