If you take a look at the results, it’s real. I charted how the relationship between Bitcoin and the S&P 500 since the beginning of 2017 and the results reveal that the correlation increased as time passes. This certainly dispels any talk of an “inflation hedge” narrative that became extremely popular during the outbreak.
However, should correlations not go downwards in time? Actually, no. Take a look back at 2017, and the overall look of the cryptocurrency landscape. It was an undiscovered asset. It was just beginning to be recognized by the mainstream media but certainly not at the volume of digital ink being sprayed over it today.
Presently, there are publicly traded companies that hold it. These are astonishing developments as compared to a couple of years back. The point is that Bitcoin is now part of the mainstream.
As a financial asset that is a standard asset – one that is a significant step in the risk spectrum, it will certainly be affected by the market.
Crypto Following in 2022
In fact, this correlation reached all-time highs in the last year and has been moving in tandem with the market. What was the upswing result from? The environment of interest rates has changed completely.
After a decade of low-interest rates and inflation, the economy has been bursting everywhere due to the incessant printing of money and the stimulus that was poured as a result of the epidemic. In order to keep this in central banks have been forced to increase their rates in rate, with those of the Federal Reserve in the US leading the charge.
Nothing drains liquidity from the market faster than rising rates of interest which is the case in high-risk assets like tech stocks, which discount cash flows to present rates that are in fact more expensive.
This is an area that is often ignored and is often not considered Bitcoin is currently in a bear market, and the overall market is also. For the first time in its history, Bitcoin is experiencing a macro environment that’s not saturated with quantitative easings, sub-par interest rates, or positive sentiment. It’s also creaking at the knees, just like every other asset in the financial market.
In times of crisis, correlations are heightened. Sellers are in a flurry when a shift to quality occurs. Liquidity is sought and defensive positions are taken and cash reserves are increased. Bitcoin at its first in history is confronting that in a hard way.
In this regard, it’s no surprise that the relationship has increased.