The correlation between bitcoin price and the stock market has grown to new highs this year. As a result, the movements in the macro markets have had a major impact on the price of bitcoin, one of the reasons behind the recent price drop. But as time has gone on, bitcoin has worked to decouple itself from this high correlation. The current data shows that the cryptocurrency could have some success after all.
Factors Driving Bitcoin Decoupling
A number of factors have contributed to the weakening of bitcoin’s correlation with the stock market. Some of these are quite obvious, while others are a bit behind the scenes. Yet the end result has been the same.
The Bitcoin miner sell-off has been one of the most prominent in recent times. With the price drop, miners have been forced to sell their assets amid rising interest rates and rising energy prices.
Another factor was that one of the largest publicly traded companies sold their BTC holding. Tesla owned about 48,000 BTC, but ended up selling 75% of all its holdings. This reduction in bitcoin holdings by large companies caused bitcoin’s correlation to the companies’ performance to decline.
ETH open interest surpasses BTC | Source: Arcane Research
There is also a decline in the funding that crypto companies receive. As the market enters another drawn-out bear market, these investments are expected to continue to decline. Add to that the higher cost of capital and access to PE, and bitcoin’s correlation with the stock market begins to weaken.
Stock market correlation down
For the past few months, bitcoin has maintained a relatively constant correlation with the stock market. This has to do with performance, be it outperforming or underperformance relative to stocks. One of the most prominent evidences of correlation is the tendency to grow high when there is gain in the stock market. However, August has shown a different run for both markets.
Usually, when the stock market makes some sort of gain, the price of bitcoin has responded by outperforming. But in the month of August, the Nasdaq is up 5.77% so far, while bitcoin has gained just 2.67% this month. This deviates from the natural trend of bitcoin making higher gains compared to the Nasdaq, evidence that the correlation in the stock market is weakening.
BTC loses steam and falls to low $23,000 | Source: BTCUSD on TradingView.com
Another proof of this is bitcoin’s correlation with risky assets. As mentioned, bitcoin’s correlation with these assets had hit an all-time high a few months earlier, but now it’s starting to fall. The correlation with risky assets is currently at the 0.5-0.6 level and is now close to annual lows.
Despite this, the correlation with Nasdaq is still relatively high. Arcane reports the current level at 0.55. So while there is certainly some form of weakening underway, it remains highly unlikely that these factors could cause a complete weakening and decoupling of the stock market.
Featured image from Blockchain News, charts from Arcane Research and TradingView.com
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