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The Fed, bitcoin and stock market correlations

Commentaries & Views

Historically, Bitcoin's price often correlates (moves the same direction) with tech stocks.

For example, the 30-day rolling correlation coefficient between Bitcoin and the Nasdaq 100 (NDX) is 93% as of May 23, 2022. On most days, BTC and NDX move the same way.

Critics often cite this correlation as a fundamental flaw. They argue that Bitcoin shouldn't move the same direction as stocks, because it's meant to be a hedge.

A Bank of America analyst recently used a variation of this concept to claim the following (as summarized by Business Insider):

"Bitcoin is not an inflation hedge and its correlation with gold is near zero, while its ties to the stock market are close to all-time highs."

Naysayers using this line of reasoning miss a few key points.

First, Bitcoin isn't meant to act as a hedge against stocks going down. That's more of a job for put options. Bitcoin is a hedge against inflation, financial censorship, and monetary turmoil. A scarce, apolitical monetary asset.

Secondly, critics employing this argument ignore the fact that Bitcoin has far outperformed tech stocks over the last 5 and 10 years. While it may move the same directionally as tech stocks, historically BTC has generated returns multiple times higher than the Nasdaq 100. On longer time scales, Bitcoin is a fantastic inflation hedge.

The chart below shows the ratio between the value of Bitcoin and the Nasdaq 100 equity index, over the past 5 years (as of May 24, 2022). A higher value indicates Bitcoin outperforming.

Over the past 5 years Bitcoin has outperformed the Nasdaq 100 by about 6 times. Of course, the flipside to this is that Bitcoin has underperformed tech stocks during corrections. Over the past year, for example, Bitcoin has lost a few percentage points relative to NDX. And the period from Bitcoin's January 2018 peak near $20,000 to lows of around $4,000 was certainly not its greatest moment.

If tech stocks keep going down, Bitcoin could too, for a while. But Bitcoin has a unique catalyst that could continue to drive its outperformance vs stocks over the mid and long-term: inflation.

Why So Correlated?

One explanation for why Bitcoin often moves in tandem with tech is that the prices of both are influenced by actions of the Federal Reserve, or its perceived future actions.

If the market believes the Fed is going to raise interest rates, and end QE, it shouldn't surprise anyone to see high-flying tech stocks, and Bitcoin, correcting. Higher interest rates could cripple this fragile economy.

Today, the market is still spooked by the idea of higher interest rates. But expectations of the Fed's resolve are starting to come down, as recently highlighted by Bitcoin Magazine's Dylan LeClair on Twitter.

If and when the market believes the Federal Reserve is going to print a lot of money, sentiment can change in a blink. Somehow, it always comes as a surprise to markets.

We saw this clearly in March of 2020. After the Black Monday II crash, central banks all over the world stepped up and printed gobs of money. Governments, especially the U.S., launched huge stimulus packages, and gave out trillions of dollars in forgivable loans to domestic businesses.

Bitcoin, having just crashed from around $10,000 to near $4,000, reversed and steadily ramped higher for the rest of 2020, before hitting new highs in December. Zero percent interest rates, inflation, QE, and too much leverage in the market helped push the price north of $60,000 briefly in 2021.

It's a crazy volatile market. In large part due to the unconventional monetary policies of the Fed. For example, low interest rates make using leverage in trading much cheaper, and generally fuel speculation.

So the big question is: Will the Fed now stay its stated course, and hike interest rates to 3-5%+ to attempt to tame inflation? Only time will tell, but I am skeptical they can "normalize" monetary policy, as outlined in The Fed vs. Bitcoin.

On a longer time scale, Bitcoin is doing remarkably well. Its use is growing organically around the world, often in places where inflation is high. It has successfully scaled to many millions of users, and average transaction fees remain remarkably cheap ($1.7 as of 5/24/22).

HIVE believes the importance of Bitcoin and Ethereum will continue to grow for the foreseeable future. The next few years may demonstrate exactly why the world needs apolitical, scarce, and programmable forms of money.

It's a volatile path, but this isn't our first cycle. HIVE will continue to build, and look to take advantage of disruptive market conditions where possible.


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.