Bitcoin surpassed $35,000 on Wednesday amidst growing excitement for spot bitcoin ETFs. And experts view the increasing buzz as the primary driving force propelling crypto forward, while stocks seem relatively sluggish on Wall Street.Thank you for reading this post, don't forget to subscribe!
“You cannot attribute Monday’s surge to any other factor,” stated Vettel Lunde, senior analyst at K33. decrypt. “The market is responding to the mounting probability of spot ETF approval, albeit with a delayed impact.”
As per CoinGecko, Bitcoin has risen by 24% in the past week. In contrast, the S&P 500 has dropped by 2.5% over the last five trading days, and the technology-heavy Nasdaq Composite has fallen by 3.3% during the same timeframe.
An ETF is a publicly traded investment instrument that tracks the value of an underlying asset. Concerning Bitcoin, Lunde stated that it is a “significant potential catalyst for inflows” as it will become easier for institutions and retailers to gain access to the cryptocurrency.
Bitcoin’s correlation with stocks has varied over the past year, but according to K33 Research, the cryptocurrency is anticipated to move in sync with stocks in 2022. Lunde mentioned that prior to the recent surge, Bitcoin’s correlation with stocks had already become quite subdued.
“The correlation narrative has significantly changed over the past year, and this is something that market participants must acknowledge,” he stated. “But it will take time.”
Bitcoin’s correlation to the S&P 500, Nasdaq, and gold has declined over the past year. Image: K33 Research.
Bitcoin’s correlation with the Nasdaq and S&P 500 has dropped from 0.79 and 0.82 last May to 0.20 and 0.16, respectively. A value of 1 indicates that two things always move in the same direction, while a value of -1 suggests the opposite.
Both stocks and cryptocurrencies faced pressure as the Federal Reserve increased borrowing costs in 2022 to alleviate decades of high inflation. However, James Butterfill, head of research at CoinShares, explained that this occurred for two distinct reasons. decrypt.
While rising borrowing costs squeezed the profit margins of publicly traded companies, making them less attractive, Butterfill stated that the simultaneous rise in yields on assets like U.S. Treasuries made Bitcoin more appealing as a store of value. Tough competition indeed.
At this juncture, Butterfill mentioned that a strong correlation is developing between stocks and bonds. He stated that Bitcoin, being a relatively uncorrelated asset, is attracting interest from certain investors—such as CoinShares clients—as an asset that can offer diversification.
By raising interest rates, the Fed makes borrowing more costly for businesses and consumers, causing the economy to cool down. However, if they become excessively aggressive, soaring borrowing costs could suffocate the economy.
In the past week, expectations of the Fed raising interest rates in December have diminished, according to CME Group’s Fed Watch tool. Butterfill stated that the gap between Bitcoin and equities could widen if the Fed indicates readiness to soon reduce them.
“Equity markets may react negatively to a rate cut because it acknowledges that we are on the verge of entering a recession,” he said. “Conversely, an admittance by the Fed that they made an error would be beneficial for Bitcoin.”
Edited by Stacey Elliott.
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