Bitcoin’s Correlation With The Tech-Heavy Nasdaq and S&P 500 Hits A Multi-Month Low

This week, the crypto market is enjoying the gains after the last few weeks’ weakness.

Both Bitcoin and the S&P 500 plummeted last week caused by thin market liquidity due to the Thanksgiving holiday in the US and the new COVID variant renewing the lockdown fear. Meanwhile, bonds rallied with yields on the 10-year US Treasury note, which moved inversely to prices, tanking to 1.48%, seeing their sharpest drop since March 2020.

During this sell-off, the VIX jumped by more than 54%, while the MOVE index hit its highest level since the start of the pandemic. VIX is the implied volatility — options market’s expectations for near-term price movements — index for the S&P 500 and MOVE is for US Treasuries.

Overall, investors have been jittery amidst monetary policy uncertainty despite central banks still providing ample liquidity.

Over the past few weeks, Bitcoin’s correlation with bonds has been stronger compared with equities as, during the equity sell-off, bonds rallied, and Bitcoin recovered most of its losses over the weekend, according to Kaiko’s latest report.

“Bitcoin’s 7-day rolling correlation with the tech-heavy Nasdaq 100 and S&P 500 has been on a downward trend since the start of November, recently hitting a multi-month low of -.6 and -.5, respectively.”

The US dollar, in the meantime, is experiencing volatility. On Tuesday, after Federal Reserve Chair Jerome Powell said the risk of inflation had increased and suggested retiring the term “transitory,” it pushed the greenback index from 95.5 to 96.6, only to fall to 95.7 today. Currently, it is again aiming for 96.

In a testimony prepared for Congress, Powell also said that Omicron could cause inflation pressures to last longer, potentially speeding the need for rate hikes.

The rise of the dollar can’t be ignored in relation to crypto, as historically, there has been a negative correlation between the DXY index and Bitcoin.

“This is something we expect since BTC is typically quoted against the dollar. But in the long term, a dollar which is too strong is normally perceived as not good for the markets,” wrote Mick Herfken of Capriole Investments in its latest note.

According to trader and economist Alex Kruger, “Crypto is now a story of adoption forces vs. macro forces,” as crypto goes mainstream while the Fed is turning hawkish.

“Rich incumbents get risk averse, newcomers buy their bags.”

Commenting on Powell talking about accelerating tapering in December that pushed the markets lower, Kruger said, one would expect the Fed to do the opposite, “Would seem as if the Fed's reaction function is changing. Or is it?”

He pointed out that these speeches are written well in advance, and Omicron is very new, only becoming a theme on Thanksgiving last week, and “the Fed would never change its view with two calendar days of data.”

“The next FOMC is in two weeks ago. By then, the Fed will bring Omicron into the equation. It will either push ahead with accelerated tapering, or not if Omicron headlines get very bad.”

7/ Either way, before Powell’s speech the market was going back to trading growth tech and selling cyclicals given the new Omicron threat. This was a similar trading environment to 2020’Q2, with rates, commodities and the USD all falling.

— Alex Krüger (@krugermacro) November 30, 2021

Unlike the stock market, crypto prices held up well, and while Fed’s comments won’t be sufficient to change the trend for risk assets, headwinds are certainly increased.

While Ether is leading the market, trading around $4,750, very near its $4,875 ATH, Bitcoin is also holding above key technical levels. Bitcoin’s 100-day moving average and the Ichimoku cloud acted as a support for the token during its recent move, and the same phenomenon was seen in September that kick-started a surge to a record high.

Despite last month's price action, Bitcoin’s fundamentals still look bullish overall, with its exchange reserves continuing to fall to another three-year low.

In December, according to Herfken, things to look out for include a volatile macro setting, with inflation and monetary policy driving the market, a possible ‘Santa Claus rally,’ and historically Bitcoin cycles topping in December, ending the bull market.