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In today’s market, it feels like only Jerome Powell’s words matter.
Looking at the data, it’s kind of true. We have plotted Bitcoin’s correlation against the S&P 500 since the beginning of 2017, and the results show a general recovery in correlation over time. This really undermines the “inflation hedge” talk argument that was so popular during the pandemic.
But shouldn’t the correlation degrade over time? Well, no. Take a look back at 2017 and remember the textures of the crypto industry. It was still a niche asset. It’s just starting to hit the mainstream and falls far short of the level of digital ink that’s flooded these days.
It is currently owned by a listed company. I visited El Salvador this summer and paid for the goods there. These are significant developments compared to just a few years ago. The point is that Bitcoin is now mainstream.
And being a mainstream financial asset and an asset well outside the risk spectrum, it is really subject to the market.
2022
In fact, the correlation hit an all-time high this year, in line with the stock market. What caused the upward shift? The interest rate environment has changed.
After a decade of historically low interest rates, inflation has reached its limit as a result of the pandemic’s relentless printing of money and stimulus measures. To contain this, central banks have been forced to raise interest rates, with the US Federal Reserve taking the lead.
Nothing drains the market of liquidity more than rising interest rates. This is especially true for riskier assets such as technology stocks that pull cash flow back into the present.
And this is often overlooked, but Bitcoin is currently in a bear market, and so is the wider market. Because we’re going through a macro environment that isn’t brimming with sentiment.
Correlations rise in crisis. Seller is promiscuous when flight to quality occurs. Liquidity is sought, defensive positions are taken, and cash reserves are increased. For the first time in its history, Bitcoin is going through it the hard way.
In this context, it’s not surprising that the correlation rose.
