Bitcoin’s Correlation With Stocks Hits 2-Month Low: Will It Decouple?

Bitcoin’s latest rally saw it diverge further from the equity market. While stock markets slumped further on news that the United States will ban Russian oil, the world’s largest cryptocurrency rallied more than 6% to break above $41,000.

Bitcoin outperformed stocks last month

The token has found its footing in recent weeks, despite tumbling in line with equities in the initial stages of the Russia-Ukraine conflict. It has lost about 6% in the last 30 days, compared to a 9% drop in the S&P 500 index.

Data from crypto researcher Kaiko showed that Bitcoin’s correlation to equities and conventional assets had touched a two-month low over the past 30 days.

In the immediate aftermath of the invasion, traditional financial assets tanked while cryptocurrencies surged, a sharp divergence from the previous few month’s trend. While Bitcoin’s bullish turnaround lacks conviction, the divergence suggests that investors briefly treated each asset class independently.

-Kaiko said in a note

A key factor in this potential decoupling is increased regulatory interest following Russia’s invasion of Ukraine, with the latter becoming the first country to officially seek aid in crypto. Fears that Russia could use crypto to bypass U.S. sanctions also saw several developed nations rush to pass comprehensive crypto regulation.

U.S. President Joe Biden will sign an executive order later in the day that is widely expected to benefit crypto adoption, while the European Union will vote on a key crypto law next week.

This could boost adoption, and help crypto markets carve their own path away from equities and other risk-driven assets.

Bitcoin’s correlation with equities is a trend observed since 2021, when a large amount of institutional interest entered the market. While this interest did power the token to new highs, it also saw it begin trading more in line with conventional risk assets.

Specifically, traders now view Bitcoin as similar to U.S. technology stocks, which also benefit from increased liquidity in the market.

Buying bitcoin now is akin to buying tech stocks (as they move together) with a call option on decoupling – within 6-12 months sounds realistic to me given what's happening in the geopolitics & FX spaces.

— Alex Krüger (@krugermacro) March 8, 2022

Still no digital gold?

Gold prices rallied nearly 8% in the last 30 days, in sharp contrast to the volatile swings seen in Bitcoin. This has dented the token’s potential as a safe haven. The token’s decoupling from gold may not necessarily be a positive trend.

The divergence from gold has also called into question Bitcoin’s viability as an inflation hedge, given that the price of the token has been unable to keep up with the sharp rise in U.S. inflation this year.