The relationship between the stock market and the crypto sector has been a matter of interest for quite some time now. Recent data suggest that the correlation between Bitcoin, the largest digital asset by market capitalization, and the Nasdaq 100 index has recorded its lowest levels in a year.
For context, the Nasdaq Stock Market is the most active stock trading venue in the US by volume and ranked second on the list of stock exchanges by market capitalization of shares traded, behind the New York Stock Exchange. The Nasdaq-100 Index defines today’s modern-day industrials composed of 100 of the largest and most innovative non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
In order to study the relationship between two variables, analysts use correlation data. The graph below clearly indicates that the correlation of daily returns between the Nasdaq 100 and Bitcoin has dropped to the lowest level since the United States Federal Reserve signaled rates hiking at the beginning of 2022.
As per data, the correlation level between Bitcoin and Nasdaq 100 touched its lowest at 34%, close to that from February 2022. This is close to levels from February last year after which it started increasing. In 2022, we see the highest correlation around mid-year when the correlation increases to go above 70%.
The analysts see the decreasing correlation as “decorrelation” and opine that it might continue in the coming times. According to analysts:
The current decorrelation could continue as the Fed rate hikes slow, further anchoring Bitcoin as an interest rate-sensitive asset.
Notably, Bitcoin previously was moving in the same direction as the large companies listed on the indexes like Nasdaq 100 or S&P 500. In September last year, Todayq News reported in September last year that some analysts opined that the correlation between the S&P 500 index and BTC was approaching 100%, while a number of IMF economists claimed to have seen a 10-fold increase in correlation between crypto and equity markets in some regions of the world.
After the increasing correlation between the variables, some financial experts started viewing it as an argument against the digital asset’s role as a diversifier. However, the recent decorrelation might prove them wrong. Notably, the decreasing correlation also implies that people can use Bitcoin as a hedge against the market which means that people can choose Bitcoin over stocks.
While talking of hedge against the market, it is important to acknowledge the role of gold. Gold has always been seen as a hedge against inflation throughout time. Sources reveal that gold has historically had a low or even negative correlation to both stocks and bonds, suggesting it offers value as a tool of diversification.
Now, it becomes the choice of investors to what they prefer as their investment choice. Last year, Stan Druckenmiller, Chairman and CEO of Duquesne Family Office LLC and a former managing director at Soros Fund Management presented his views on this topic. At a point in his career at Soros Fund, he was managing assets worth $22 billion.
Druckmiller had said he would own Bitcoin over gold in such a market scenario to hedge his positions. However, he said if the markets are bearish in a recessionary environment one would want to own gold.
At the moment, Bitcoin is trading at the price of $19,854.40 which marks a decrease of 2.51% on the day and about an 11.51% drop over the past 5 days. Simultaneously, the crypto market has continued to crash under significant selling pressure and the increasing ‘FUD’ (Fear, Uncertainty, and Doubt) in recent days, which have together managed to pull its market cap to decline below the $1 trillion psychological threshold.
Adding to the FUD, the U.S. government has moved $1 billion worth of Bitcoin it seized from the anonymous dark net marketplace. However, this could also represent a good opportunity to buy the maiden crypto before its price increases again, as Bitcoin has been demonstrating a steady pattern of optimal times for decision-making in crypto trading strategies – buy, hold, and sell – over the past years.