01 Aug 2022
Bitcoin keeps following the stock market
If you are trying to predict the bitcoin price, you should pay attention to the macro environment and the US stock market.
2022 has been difficult for the stock market, with the S&P 500 declining 14% and the tech-oriented Nasdaq falling 22%. With bitcoin closely following equities, albeit with higher volatility, it's no surprise that bitcoin (-51%) has fallen even more than the stock market in 2022.There are two main reasons behind bitcoin's weak start to 2022. The first is forced selling related to all the prominent market participants failing in May and June. The second is rising interest rates.Recently, monetary and fiscal policy decisions' significance on the financial markets has increased due to worsening macro conditions as inflation runs rampant. Attempting to reduce inflation, the Fed has raised its funds rate from 0% in March to 2.25%-2.5%.Rising interest rates increase the cost of capital and thus lead to falling stock prices, and riskier tech stocks have declined the most. As institutional ownership of bitcoin has grown, bitcoin has become intertwined in the general financial markets and thus increasingly correlated with the stock market. This relationship has been further strengthened by the increasing importance of monetary and fiscal policy, which has led to increasing correlations not only between bitcoin and the stock market but between most financial assets.If the stock market keeps falling, bitcoin will also decline. Still, the recently forced selling in the crypto market has flushed out a significant amount of idiosyncratic risk, meaning that bitcoin will likely not continue falling disproportionally compared to the stock market.