It used to be that when you were trading Bitcoin that one of your guides could be the Nasdaq market. That was because Bitcoin and the Nasdaq tended to rise and fall in tandem. The Nasdaq market reliably rises and falls with stock fundamentals, as well as market sentiment. Its correlation with Bitcoin was useful because Bitcoin does not have the same sorts of fundamentals. However, recently that correlation has turned negative. What happened to the Bitcoin stock correlation? How does this affect Bitcoin trading?
Stock Market Soars While Bitcoin Slumps
If we look at Bitcoin and the Nasdaq market from November 9 to November 15, 2023 you see that the Nasdaq market surged. It was a “buy everything” moment according to commentators. Meanwhile Bitcoin traded sideways and then fell on the 14th before recovering on the 15th. Why did Nasdaq as well as the Dow Jones Industrial Average and the S&P 500 all soar? Inflation is coming under control so the US Federal Reserve is probably done raising interest rates. And the US House of Representatives passed a bill to forestall a government shutdown due to the debt ceiling.
These factors do not directly affect Bitcoin but, when Bitcoin tracks with the Nasdaq one would expect to have seen it rally along with stocks. That did not happen.
What Factors Are Driving Bitcoin?
The issue of crypto winter has been rehashed time and time again. However much we may be tired of hearing about it, the year long crash of crypto currencies left its stamp on the market. The excitement of the 2017 to 2021 era is gone. People are, hopefully, no longer putting second mortgages on their home in order to invest in Bitcoin. Big money investors that jumped into cryptocurrencies in expectations of profits learned their lesson. Thus, the pool of Bitcoin enthusiasts is smaller than it was a couple of years ago. A factor that has driven prices of late is the prospect of spot Bitcoin ETFs. The rationale is that these investment vehicles would attract a whole new class of investors. These would be folks with money but who are not interested in having a crypto wallet or keeping track of the keys needed to access their assets in cyberspace.
What Happened to the Bitcoin Stock Correlation?
According to Bloomberg, the relationship between Bitcoin and the stock market has not just weakened over the last month. It has gone negative. At -.23 this means that stocks and Bitcoin are moving in opposite directions. The range of correlation goes from +1 which means that two data sets are moving in lockstep and -1 where two data sets are moving exactly opposite of each other. Two things come to mind. The stock market is used to stocks going up and down, market crashes, recoveries. Despite the prior volatility of Bitcoin, the crypto market never anticipated the total wipeout that was crypto winter. The stock market knows that lower interest rates are good for stocks and investors are comfortable with that market. Those who tried Bitcoin and got burned are unlikely to try again. Those who sat on the sidelines and said Bitcoin was another Dutch tulip bulb market that was going to fail were justified in their caution and doubly unlikely to invest in crypto.
It would appear that investors are distinguishing between Nasdaq and crypto which was not necessarily the case a couple or three years ago. As such, factors that drive stocks may be less likely to affect cryptocurrencies going forward and vice versa. Then there are the regulatory issues that crypto will need to deal with in the coming years. These are basically things that the stock market already has in place and not in any way negative for markets like the Nasdaq.
SlideShare Version – What Happened to the Bitcoin Stock Correlation?