Cryptocurrencies are decoupling from traditional assets in ways not seen in the recent past. Leading the divergence is Bitcoin, which is threatening to break out amid fizzling stock market rallies. For the longest time, Bitcoin and stock markets have enjoyed a positive correlation. However, not anymore, with the flagship cryptocurrency recording a 50% rally as stock markets rally wanes amid economic slowdown concerns, high-interest rates, and the risk of recession.
Stocks have come under immense pressure in recent weeks amid heightened concerns that the Federal Reserve might not go slow on monetary policy tightening. Inflation remaining at elevated levels has eroded initial expectations of interest rate cuts later in the year. With the global economic outlook deteriorating amid a high-interest rate environment, investor sentiments have declined significantly.
A positive correlation between the S&P 500 and Bitcoin has since dropped from a high of 0.8 to a low of 0.3. The decline signals that stocks and Bitcoin are moving in the opposite direction. In addition, the negative correlation between Bitcoin and the US dollar is also disappearing, with digital assets rallying even on the greenback strengthening across the board.
According to digital research company Kaiko, Digital assets are increasingly decoupling from traditional assets. The decoupling involves crypto-specific events drawing investor interest and fueling the bull run. One of the events in Hong Kon pivoting to a pro-crypto stance. The semi-autonomous region has already outlined plans to allow retail investors to trade cryptocurrencies.
While Hong Kong is usually under China’s grip, its push to allow people to trade larger coins is a big statement. For the longest time, China has maintained zero tolerance for cryptocurrencies banning the mining and trading of Bitcoin and other currencies. Such positive developments will always fuel investor interest in the highly speculative asset class.
Investors have continued to bet on Bitcoin and other cryptocurrencies despite the growing risk of further interest rate hikes and recession risks. The flagship cryptocurrency has since powered through the $24,000 hurdle, with the next stop above the $25,000 hurdle. Most of the buying is happening in Asia, accounting for 59% of the flows. The buying pressure in Europe accounts for 55% of the total flow. In the US, net sellers are the majority on regulators ramping up scrutiny of the sector.
While Bitcoin is already up by more than 50% for the year, the S&P 500 has only returned 6%. Gold is up by about 1%, and the tech-heavy index is up by about 13%. The big question is whether Bitcoin and other cryptocurrencies will maintain the rally even as investors remain wary of the economic outlook.
Strategists at Morgan Stanley and JPMorgan have already painted a negative outlook of the market, insisting that the bear run experienced last year is far from over. According to the analysts, the fundamentals are yet to improve to justify any significant move up.
Of great concern is the high-interest rate environment, slowing economic activities and the risk of the global economy plunging into recession. It is still unclear whether investors will shun the headwinds and continue betting on Bitcoin and other cryptocurrencies at the expense of traditional assets.