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As Bitcoin’s price surged past $26,000 on Tuesday, crypto traders were quick to claim that the recent uptick in digital asset prices represented a significant shift in momentum.
Crypto Twitter is filled with examples of users claiming that the spike in Bitcoin’s price is evidence of digital assets diverging from other risk assets like stocks, with some calling it “The Great Decoupling.”
For much of last year, digital assets and equities have traded in similar directions, amid an economic slowdown and tightening monetary conditions spurred on by an aggressive series of interest rate hikes from the Federal Reserve.
Though crypto is surging ahead in the short term, it's too early to say that the asset class’s correlation has been broken given the fact that the Fed’s monetary policy stance is still a major player in today's markets, Wave Digital Asset’s Managing Director Nauman Sheikh told Decrypt.
“I wouldn't say the correlation has broken down,” he said. “[Traders are] focused on the idea of decoupling because they're all looking for a reason for the space to rally.”
Even though Bitcoin is up 56% since the start of this year compared to a 9.6% increase in the Nasdaq Composite and a 2% bump in the S&P 500, the correlation between crypto and stocks remains palpable.
“I would say it’s still too early, as I expect initially all risk assets to move in tandem if the Fed does pivot,” IntoTheBlock’s Director of Research Lucas Outumuro told Decrypt. “But a few weeks later it could begin to be less correlated as the largest macro headwind eases.”
According to IntoTheBlock’s correlation matrix, Bitcoin’s correlation to the Nasdaq and the S&P 500 has actually increased over the past week, from -0.23 and -0.28 to 0.24 and 0.33, respectively.
Correlations are often calculated in a way where a value of 1 indicates that two things always move in the same direction, and a value of -1 means the opposite.
Though Bitcoin’s correlation to the S&P 500 and Nasdaq remains positive, the measure has decreased since Jan. 31, when Bitcoin’s correlation to the S&P 500 was 0.85 and 0.92 to the Nasdaq.
Outumuro said that the recent spike in digital asset prices is partially based on events like an inflation report released Tuesday and the prospect of the Fed potentially putting interest rate hikes on pause following the collapse of Silicon Valley Bank last week—events that favored stocks as well.
“Large news events such as the CPI print have been mirrored in both asset classes,” he said. “Crypto being further out the risk curve is benefiting [it] disproportionately.”
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