Crypto Decoupling or Correlation Mirage? Analyzing Bitcoin’s Soaring Price and its Relationship with Stocks.

The start of 2023 has been a very promising time for the cryptocurrency industry, especially Bitcoin – as its unprecedented bullish performance has given crypto traders plenty of reason to be hopeful that the worst of the bear market has finally concluded. This market strength is reflecting in Bitcoin’s decreased fear and greed index, the growth of volume and volatility, and the rising profit and loss ratio of on-chain analytics signaling the reduction of market fear. Furthermore, it appears that this performance is leading Bitcoin to being decoupled from equities markets, an occurrence that has had crypto traders talking about the possibility of ‘The Great Decoupling’.

Much of the discussion regarding this possibility is sparked by the stark contrast between Bitcoin’s 56% increase in value since the start of the year compared to the meager 9.6% increase of the Nasdaq and 2% bump of the S&P 500. This has some speculating that this could be evidence of a potential macro shift, causing Bitcoin’s correlation to equities to lessen, and therefore reducing its intrinsic risk.

However, as much of the Bitcoin price movement is still highly correlated to events like the recent inflation report and the possible pause of interest rate hikes following the collapse of Silicon Valley Bank, it is still too early to determine if the asset class’s correlation has been broken. Nevertheless, analysts still consider these factors to be strong indicators of a potentially greater decoupling in the near future.

As Vetle Lunde, Senior Analyst at Arcane Research explains: “The previous correlation between Bitcoin and traditional markets could have been driven by institutional investors bundling BTC with other risk assets and large growth companies like Tesla holding exposure. As institutional investors and growth companies hold less Bitcoin, correlation to markets may lessen in time.”

Data from Cointelegraph also provides some arguments for this eventual decoupling. For example, the increase in trading volume from $5.5 billion seven-days prior to a whopping $10.8 billion after the Bitcoin spike is a positive sign of market strength in the face of growing sell pressure. Coupled with BTC’s 30-day correlation to the Nasdaq reaching 0.29, which is the highest divergence from equities since December 2021, analysis of Bitcoin’s performance becomes even more compelling.

Kaiko, a crypto data and insights provider, notes that: “Bitcoin’s correlation with the S&P 500 hit both an all-time high and dropped to 15-month lows. The lows were reached during FTX’s collapse, while the highs emerged in the final week of December. This is the best evidence yet that macro is back.”

So, does this mean that Bitcoin and other digital assets will decouple from traditional markets like stocks? While it is too early to make any definite conclusions, there is no denying that this performance is further proof of Bitcoin becoming a viable investment alternative to stocks and other risk assets. The big question now remains when the S&P 500 bear market will end, as its end may very well correspond to the bottom for bitcoin. We will just have to wait and see what 2023 has in store.

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Kassidy Florette
Kassidy followed her friends to buy her first Bitcoin in 2015, has been participating in various projects since 2019 as a marketing communication lead. Her knowledge and passion brings her in as a contributor.