- The short-term Bitcoin/stocks correlation briefly diminished but has since rebounded
- Traders in both asset classes are watching the development of interest rates closely
- Bitcoin and the Nasdaq remain intertwined in the long-term
The past few weeks have seen a period of market volatility, with a bank run on the crypto-friendly Silicon Valley Bank (SVB) triggering upheaval across the board. One of the more interesting developments to come out of this was a brief deviation from the typical Bitcoin/stock market correlation.
The chart below shows that the correlation, as measured by a rolling 30-day metric, dipped during this period. However, it has since started to revert to its usual high level of correlation.
This is not an entirely unfamiliar pattern. We have seen a similar divergence in correlation a few times in the last year, most famously during the FTX crash in November 2020. In each case, the correlation quickly bounced back.
The chart also highlights that, regardless of the fluctuations, the relationship between Bitcoin and stocks is consistently close.
The big question going forward is what will happen with the correlation. Market expectation surrounding interest rates has been a major factor in the strengthening of the relationship between Bitcoin and stocks, particularly tech-heavy indices like the Nasdaq.
The mismanagement of the collapsed banks triggered a shift in the rate forecasts, with the market now predicting more rate cuts than hikes, as opposed to the opposite previously.
It is not unthinkable that a return to a less tight monetary policy could cause some degree of decoupling between Bitcoin and stocks. However, there isn’t much to suggest that this will be a major shift, and the historical evidence points to the two assets remaining closely linked.
In the long-term, some predict that Bitcoin will eventually deviate from stock markets and become a separate asset class. But, for now, the relationship between the two remains strong. The last couple of weeks, and the resumption of this correlation, is a reminder of this.