16 Aug 2022

A structural shift in BTC’s strongly correlated environment to U.S. equities?

BTC’s short-term correlation to the broad financial markets has declined towards yearly low levels, with BTC underperforming Nasdaq. A sign of a structural shift?
Source: Tradingview (Coinbase, Binance US)
Overall, the broad financial market has seen a strong relief in risk assets, evident by Nasdaq seeing 5.77% gains since Aug 1st. Bitcoin usually outperforms equities in these conditions but has underperformed thus far in August (+2.67%). Meanwhile, amid this underperformance, BTC’s correlation to risk assets has declined and flattened near yearly low levels of 0.5-0.6. The correlation of BTC to equities is likely caused by a myriad of forces, mostly connected to BTC being viewed as a risk asset by professional investors, in addition to BTC’s relationship to general liquidity and monetary policy. However, the effects of certain relevant forces contributing to BTC’s high correlations to other risk assets have softened over the last months. We’ll mention three such forces below and will elaborate further in a deep dive later this week.
  1. Reduction of BTC holdings from large public companies (i.e. Tesla).
  2. Forced selling from miners on the backdrop of increased interest rates and energy prices.
  3. Previous ease of access to private funding and a sharp focus on growth by crypto companies amid the fruitful bull market conditions in 2020-2021. This was followed by a very sobering hangover related to the increased cost of capital and general reduction of access to private funding for growth-oriented private crypto companies, creating the perfect condition for the May and June meltdowns.
Yet, BTC’s current 30-day correlation to Nasdaq remains high at 0.55. Automated trading strategies and the well-known associated correlation between bitcoin and other risk assets may act as a self-fulfilling prophecy in the coming period. The aforementioned softening correlation forces may not be sufficiently strong to lead to a structural shift in this trend. As a side note, bitcoin and gold have been largely uncorrelated since May. A well-balanced portfolio consisting of gold and bitcoin may be an interesting play onwards, with gold seeming like a potent valve to hedge out risk.
Share this article