Bitcoin Drops Against Stock Rally, Highlighting Pandemic-Era Correlation Shift

Key Takeaways

• Bitcoin experienced a decline despite a subdued CPI, which triggered a surge in stocks.
• The year-on-year growth of the US CPI marked a deceleration from September.
• The question is whether the enthusiasm surrounding ETFs can generate further upward momentum for Bitcoin.

The Consumer Price Index (CPI) data for the United States, a gauge of retail inflation, fell slightly below market expectations. This lower-than-expected headline CPI inflation not only affected stock markets but also influenced the value of cryptocurrencies like Bitcoin.

While a global buying spree has influenced various markets, Bitcoin registered a 3% decline following the release of soft U.S. inflation data that prompted increased risk appetite across different assets.

Bitcoin Fails to Ride Global Market Surge 

This dip contrasts with a 2% surge in a global stock index , reflecting expectations that the Federal Reserve will shift from interest-rate hikes to cuts in the coming year.

The 30-day correlation coefficient between Bitcoin and MSCI Inc.’s global stock gauge now stands at minus 0.23, marking the most negative correlation since the start of the pandemic in early 2020. A correlation coefficient of 1 indicates synchronized movement, while minus-1 signifies opposing directions.

Under normal circumstances, a decline in bond yields, a surge in equities, and the anticipation of a Federal Reserve policy reversal would typically be perceived as a favorable environment for cryptocurrencies, given their association with speculative enthusiasm.

However, Bitcoin had already experienced a doubling in value in 2023, driven in part by optimism surrounding the potential approval of the first U.S. exchange-traded funds directly investing in the token. These substantial gains prompted a degree of caution regarding the extent to which Bitcoin could further advance.

https://twitter.com/TWPFinance/status/1719459226509287778

Tony Sycamore, a market analyst at IG Australia Pty, suggested , “Ahead of the expected ETF announcement, the market has had a good rally, and perhaps last night’s selloff was weak hands folding given a lack of continued upside progress over the past week.”

Sycamore further noted that as Bitcoin approaches the $38,000-$40,000 range, there is an increased likelihood of a “buy-the-rumor-sell-the-fact-type” reaction once the ETFs receive regulatory approval.

At the time of writing, Bitcoin, having previously reached a record high of nearly $69,000 in late 2021, was trading at approximately $36,258. The second-ranked token, Ethereum , was hovering just below $2,000.

Crypto’s Promised Panacea Faces Challenges

Cryptocurrency has frequently been hailed as a panacea for various economic challenges, from inflation and low-interest rates to diminished purchasing power and the devaluation of traditional currencies. These optimistic views were easily embraced during the period when cryptocurrency values were on the rise, seemingly independent of other financial assets.

According to Brian Spinelli, co-chief investment officer at wealth advisor Halbert Hargrove:

“Higher rates generally lower appetite for riskier investments, and that is likely one of the causes for a significant pullback in digital asset prices over the last year.”

In fact, cryptocurrencies, much like other high-risk assets, responded to diminished liquidity. This decline was evident when the Federal Reserve signaled its intention to raise interest rates in November 2021 and persisted throughout 2022 as the Fed implemented these adjustments aggressively.

The confidence of traders in virtual assets took additional hits due to specific cryptocurrency and exchange failures, such as those witnessed with FTX. However, instability in the traditional banking sector prompted many traders to invest in cryptocurrencies, anticipating a less severe trajectory for future rate increases.