Although touted as a hedge against inflation, Bitcoin’s price has become increasingly correlated with the stock market in recent months. The latest market stats on TradingView show a 90-day correlation of 0.59 with the S&P 500, this is considered to be moderately strong. Meanwhile, the correlation with the Nasdaq tech stock index stands at 0.62, it is almost as if Bitcoin’s price is moving in tandem with the legacy markets.
So, what are the factors behind this synergy in price movement? Before diving into the details, it is worth noting Bitcoin and tech stocks are both considered to be risky assets. However, it is only recently that the correlation between the two asset classes has shot up. The global market turmoil has been quite a rollercoaster, with risk-on traders and investors taking a big hit amid the ongoing chaos.
That said, the correlation between Bitcoin and tech stock has primarily been influenced by two main factors; macroeconomic uncertainty and diversification from risky assets.
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1. Macroeconomic Uncertainty
With the world emerging from the covid pandemic, there is a looming macro uncertainty; traders and investors at easyMarkets are trading more carefully than ever before while using their app. This is because of the increase in inflation and Consumer Price Index (CPI) that have ultimately forced the U.S Federal Reserve to hike rates for three consecutive quarters.
Currently, the Fed benchmark interest rate is between 3% to 3.25% after a 75 basis point hike was announced in Q3. Notably, this is the highest it has been since the 2008 financial crisis. As any sane investor would expect, this rising cost of living has negatively affected both tech stocks and Bitcoin.
More interestingly, risky assets had earlier on tanked following the 8.3% CPI confirmation by the FOMC. Even the much-awaited Ethereum merge did not stand a chance. Six of the leading U.S tech companies lost over $500 billion in value while Bitcoin and Ethereum were down 10% within a single day.
2. Diversification From Risky Assets
As mentioned in the introduction, tech stocks and Bitcoin are considerably risky compared to other assets such as treasury bonds and commodities. While they can be quite lucrative in bull markets, risky assets are normally the first casualties of tough economic conditions. Investors have been reducing their exposure to Bitcoin and tech stocks since the beginning of the year.
To put it into perspective, the crypto market is now below a trillion dollars, having peaked to $2 trillion at the height of the November 2021 rally. On the other hand, big hedge funds have been scaling down their tech stock investments for more stable assets. While it may not seem obvious to the average investor, this type of portfolio rebalancing has affected the prices of Bitcoin and tech stocks in a similar manner.
Conclusion
The correlation between Bitcoin and tech stocks has evidently grown bigger in these unprecedented times. However, this does not dismiss the upside potential of both asset classes; should inflation go down next year, it is more likely that the gap will widen as investors throw in more muscle into the future of finance, Bitcoin and the likes of Ethereum.
