Bitcoin’s correlation with the stock market has been on the rise over the last year. What started out slowly had quickly ramped up in the last few months to reach the highest correlation points in recorded history. Once this had peaked, it was expected that both markets would begin to decouple from one another. However, this would prove to not be the case. Even through the crypto market decline, the correlation with stocks has continued to wax stronger.
There are a lot of things that have been attributed to the cause of the decline in the crypto market. With coins such as Bitcoin touching two-year lows, the market is in a panic and presently, fingers are being pointed at Celsius’s suspected insolvency being the most recent culprit. However, looking back, there is a strong correlation between the movement in the price of bitcoin with that of the crypto market.
Taking a look at the equity markets shows that when the market correlations were low was when the equity markets were in recovery. Likewise, a decline in the equity markets has now been matched by the crash in bitcoin’s price. Even though it was expected that this structure would change, current events show that the correlation may yet last longer than expected.
U.S. CPI numbers as of last Friday had come out at 8.6%. The expectations had been set to 8.4%. As such, this shocked the market to its core. What would follow was a dive in both the NASDAQ and S&P 500, and a look at Bitcoin’s chart showed that the digital asset had recorded a similar movement.
Nevertheless, not all of the blame goes to the stock market. While it may have been the trigger, other events have contributed to the drag that followed. Mainly the Celsius rumors and the lending platform halting withdrawals and transfers, sparking significant fear around insolvency.
The FOMC meeting has been scheduled for Wednesday. Once again, the Fed will be making some important decisions regarding the equity markets. The high rate of inflation had already seen the 2-year T-note soar above 3%.
With the meeting, investors are expecting two things to follow; more correlation of bitcoin to the stock market and more volatility. This would likely mean that both the equities markets and bitcoin will be seeing more decline. This will mirror the rise in the T-note percentages.
As the Fed has initiated the balance sheet reduction, this includes the new quantitative tightening in an effort to remove liquidity in the market. This exposes the markets to the risk of further decline as this liquidity is sucked out. This coupled with all of the disruptions, insolvency fears, and negative sentiment spreading among investors, investors are advised to brace for the worst.