- First Republic becomes the latest bank to collapse in the US
- Bitcoin has rebounded this week as it did in March when the SVB fell and triggered a banking crisis.
- Our head of research, Dan Ashmore, argues that Bitcoin is still a risky asset despite claims from enthusiasts that decoupling is happening.
- Correlation with the stock market remains high, he wrote, pointing to changing expectations regarding interest rate policy as the reason for Bitcoin’s rally.
Recently there has been (again) chatter in the market. Bitcoin Separated from the stock. As the banking turmoil that hit the United States intensified, the proposal that Bitcoin would provide an alternative store of value outside the realm of fiat currency suddenly became more valuable.
Let me start by saying that I don’t think my opinion is very valid here. The future cannot be predicted. But I would like to see the numbers because I believe that this theory that Bitcoin was decoupled is objectively proven wrong.
i wrote deep dive On the correlation between Bitcoin and stocks in March when the Silicon Valley Bank collapsed and this theory first surfaced while Bitcoin was on the rise. The same logic still applies, so let’s summarize by updating the same numbers.
And a quick note – this article is not about my beliefs about Bitcoin’s long-term trajectory. Whether or not it establishes itself as a means of storage for today As of May 2023, Bitcoin trades like an extremely risky asset and is completely removed from this uncorrelated vision.
Correlation between Nasdaq and Bitcoin
A natural place to look is technology stocks, one of the riskier subsectors of the equity universe. The Nasdaq is a technology-focused index and is often considered the benchmark for the sector. Let’s chart the correlation between Bitcoin and the Nasdaq over the past few years.
Using Pearson’s 60-day measurement, this graph shows that the correlation has changed significantly over the past two years. However, most show a relatively strong relationship, often above 0.5.
Had some dips. The first was apparently May/June 2021, when Bitcoin plummeted from $63,000 to $31,000 for no apparent reason before rising again later that year into the late 60s.
The second big drop in correlation is in November 2022. This is none other than the collapse of FTX, an incredible implosion that has shocked the cryptocurrency industry. At the same time, softening inflation data and heightened optimism about the future path of interest rates actually sent stocks much higher. It shows a large drop in correlation.
Therefore, there were two very large periods of decorrelation worth noting. Both of these occurred when cryptocurrencies collapsed, independent of the stock market. If you take a closer look at last year (I’ve shown last year’s correlations below), you’ll see another big deviation in the summer of 2022 when the cryptocurrency “bank” Celsius closes its withdrawals. prize.
And most importantly, the correlation is recovering quickly each time. It also includes March when Bitcoin outperformed in the aftermath of the banking crisis.
But did March really outperform? The above correlation remained relatively high, far from previous de-correlation episodes and much shorter. , fell further before the deposits backing the second-largest stablecoin, USD Coin, were assured to be safe. and then reacted strongly. Well, because it’s risky.
Besides, the elephant in the room is the Federal Reserve. The market has been running off expectations for his Fed policy throughout the year and this was the real cause of his March and this week’s moves.
With the collapse of the SVB, markets reacted to the Fed’s announcement of a massive liquidity injection and expectations that interest rates would not rise much in the future as a result of the banking system’s creaking. Both of these things are good for risk assets and bitcoin has gone higher. Again, not because the fiat currency system could collapse.
Needless to say, these bank problems stem from duration risk management and are completely different from the 2008 GFC bank problems. The 2008 GFC was a full blown bankruptcy crisis built on a terrifying underlying asset (subprime mortgages). Today, the banking crisis is still a crisis, but it is a regional crisis born out of the most aggressive rate hike cycle in recent memory, causing the value of bank assets to fall, pushing higher interest rates elsewhere. Deposits are withdrawn for use, leading to an unsustainable situation. Bank runs run as trust evaporates.
We’ve seen a similar development this time around, with First Republic Bank falling last week after revealing more than $1 billion in withdrawal requests in the previous quarter.
Again, the market reacted to these changes by: “Okay, the Fed can’t hike rates any more. This is good for risk assets.” Looking at the odds for the Fed funds, we expect a 25 bps rate hike today (May 3rd), but after that… nothing. The market sees this as the last rate hike.
Therefore, it is important to track the underlying variable (interest rate policy) when evaluating correlations and trying to understand why Bitcoin is moving. For the time being the numbers are pretty clear and the conclusion is clear: Bitcoin trades like a risky asset. Take a look at the chart below which plots Bitcoin’s return against the Nasdaq since the beginning of 2022. Do you really want to claim that these assets are uncorrelated?
The numbers speak for themselves. Again, this is no speculation about what might happen in the future. Tomorrow Bitcoin could hit $1 million and the Nasdaq could hit zero. Bitcoin may one day reach a store of uncorrelated value. But for now, the numbers are clear. It trades like a risky asset.