Tech
Bitcoin tech stock correlation hits new high since August
Bitcoin (BTC-USD) found itself in a group with other speculative investments in the run-up to the latest Federal Reserve tightening cycle, falling on expectations that higher interest rates would dampen risk appetite. Now, with optimism growing that funding costs could soon fall, supporters of the largest cryptocurrency argue it is more like high-growth assets such as shares of technology companies.
The token has been trading as such recently. THE 90 day correlation The coefficient on the digital currency and tech-heavy Nasdaq 100 index hit 0.46 this week, marking its highest level since late August. A coefficient of 1 indicates that the assets are moving in lockstep, while minus 1 would show that they are moving in opposite directions. After the Fed began raising the target rate on overnight loans between banks in early 2022, the correlation jumped to above 0.8, the highest level since digital assets burst into mainstream consciousness.
Joshua Lim, co-founder of trading firm Arbelos Markets, noted that people are redirecting their attention towards cryptocurrency as a growth asset or as an asset that embodies the value of the network. Lui explained that its capacity as a technology and means of transferring value means it will show a stronger correlation with other assets also characterized by growth, such as the Nasdaq and technology stocks.
Bitcoin supporters have consistently promoted the currency as an uncorrelated asset, free from government influence and resistant to outside pressure or influence. Introduced to the public in 2008 by an individual or group known as Satoshi Nakamoto, Bitcoin was conceived to establish a decentralized currency independent of government and central bank control. Throughout its evolution, it has been heralded as the digital equivalent of gold, a hedge against inflation, and a store of value. However, Bitcoin’s price volatility has undermined many of these narratives. The approval by US ETFs earlier this year to directly hold Bitcoin has opened the token to a new level of investors.
Lim pointed out that various factors, such as the introduction of US ETFs, Bitcoin’s record surge in March and the blockchain halving in April, have served as significant incentives for mainstream investors to take note of the cryptocurrency asset class and start to invest in it. However, with these catalysts now a thing of the past, attention has shifted more towards the broader macroeconomic landscape.
Bitcoin surged after ETFs went live in January, reaching a record high of nearly $74,000 in March, before paring gains as demand for the investment vehicles began to cool. The token rose about 1.4% on Friday to around $66,200 and is up nearly 10% this week. Bitcoin has jumped about 58% this year, compared to an 11% rise in the Nasdaq 100.
Lim pointed out that various factors, such as the introduction of US ETFs, Bitcoin’s record surge in March and the blockchain halving in April, have served as significant incentives for mainstream investors to take note of the cryptocurrency asset class and start to invest in it. However, with these catalysts now a thing of the past, attention has shifted more towards the broader macroeconomic landscape.
Data released on Wednesday pointed to a moderation in underlying inflation in the United States in April, marking the first decline in six months. This development is in line with the direction Federal Reserve officials want before considering a rate cut. Specifically, the headline consumer price index, which excludes volatile food and energy costs, rose 0.3% since March, after three consecutive months of better-than-expected readings.
Even so, several Federal Reserve officials stressed Thursday the importance of maintaining higher borrowing costs for an extended period as they await further evidence of easing inflation. This position suggests that they are not inclined to hastily reduce rates.
Lim expressed the view that if the Fed were to reduce rates, it would generally have a positive impact on risky assets. They added that such a scenario would also be favorable for cryptocurrencies.
CCData noted that despite cryptocurrency investors’ increased focus on the Federal Reserve, Bitcoin has demonstrated consistent growth and resilience since the launch of US ETFs, according to Winterflood.
Winterflood noted that it would be interesting to watch the consequences if the Fed actually cuts rates in the coming months. They questioned whether Bitcoin could replicate its past behavior as a perceived riskier asset, or whether it would transition to simply becoming an alternative asset embraced by conventional markets.
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