- Bitcoin skips out on the rebound in stocks but joins in on the decline.
- The lack of rebound for Bitcoin despite a rebound in stocks may be due more to portfolio rebalancing for stocks and bonds than anything to do intrinsically with correlation.
You know those couples? The ones who you can’t stand being around because when they’re good together, they are sickeningly sweet, but when they erupt on each other, it’s like being in the middle of a warzone?
Bitcoin and stocks appear to be having that exact relationship because they’ve de-correlated in the good times and re-correlated in the bad times.
Before the end of last week, investors bemoaned the strong correlation that Bitcoin had with assets such as tech stocks, hoping for “decoupling” so that the crypto asset class could make its way higher, independent of the vagaries of the broader market.
But crypto investors should be careful what they wish for, because they just might get it.
Last week, even as stocks rebounded strongly, Bitcoin sank lower, taking other cryptocurrencies down with it and this week, it appears to be coupling again with other risk assets at a time when risk aversion is again weighing on the class.
Dipping below US$30,000 again, a significant level of support, Bitcoin fell alongside the tech-heavy Nasdaq 100 Index for a second straight day.
While traders speculated last week that cryptocurrencies would begin to decouple from risk assets as investors focused more on industry specific factors, those views have since come under pressure from Bitcoin’s re-coupling with tech stocks and other risk assets.
If nothing else, Bitcoin has had the worst sort of coupling and decoupling with risk assets like the Nasdaq 100 – skipping the rallies but joining the declines.
Of course the decoupling may have had entirely nothing to do with Bitcoin itself and the rebound in stocks could have been due to the end of the month scramble by funds to rebalance stock and bond portfolios.
As stock prices plummeted, typical 60/40 stock and bond portfolios became overweight on bonds, and in an effort to preserve the ratio in these allocations, managers may have raced to top up their stocks, leading to a sharp increase in price just before the end of the month.
No such requirement exists for cryptocurrencies, which is why they may not have enjoyed the bump up, even as stocks did.
And that is likely why despite the fact that cryptocurrencies have seen an increasingly strong correlation with stocks, the former skipped out on the rebound that the latter enjoyed towards the end of the month.
90-day correlations between Bitcoin and the Nasdaq 100 now stand at around 0.68 (a reading of 1, indicates the two assets move in the same direction and with the same magnitude whereas -1 indicates they are perfect opposites).
