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Emily Nicolle
Joanna Ossinger
Cryptocurrencies appear to be kicking off the week with a more positive outlook than U.S. stocks, just as some strategists are predicting the recent high correlation between the two may begin to ease.
Digital coins formed a sea of green Monday, with Bitcoin and Ether trading higher following a weekend of mixed performance, putting the world’s largest cryptocurrency range-bound between $37,000 and $40,000. Unusually, even outlier altcoins and memecoins such as Solana’s SOL, Terra’s LUNA and Dogecoin, which are more prone to wild volatility, were trading broadly flat as the crypto market experienced a near-unilateral sense of calm.
Conversely, trading sessions in Asia and Europe on Monday saw stocks weather a rocky ride on rising geopolitical tensions, as the U.K. revealed fresh retaliation against Russia’s central bank over the country’s invasion of Ukraine. The MSCI AC Asia Pacific Index erased losses of as much as 0.7% to trade higher, while the Stoxx 600 shed 1% by midday. The S&P 500 also opened about 1% lower.
Bitcoin’s 60-day correlation with the S&P has climbed in the wake of the Ukraine crisis with a 0.6 rating level. A value of 1.0 would signify assets moving in perfect harmony and -1.0 would mean completely opposite, with zero showing no correlation at all. But Monday’s move could be the beginning of a divergence based on historical data.
“If you look at crypto specifically, when the traditional macro markets go down, crypto tends to be correlated with them for a period of roughly 70 days -- so a bit over two months -- and then it begins to break its correlation,” said Joey Krug of Pantera Capital in a recent note. “And so we think over the next number of weeks, crypto is basically going to decouple from traditional markets and begin to trade on its own again.”
In other parts of the market, Bitcoin’s moves appear to be less related. Take places outside the U.S.: When it’s compared with the Stoxx Europe 600, the correlation is 0.26 -- and it’s 0.07 for the Shanghai Shenzhen CSI 300 Index of Chinese shares.
“It’s very useful to break correlations/beta up by frequencies -- i.e., short vs. longer-run,” said strategist Benson Durham of Piper Sandler, a former senior staff member at the Federal Reserve Board. Bitcoin and the S&P 500 “tend to be much more correlated in the long rather than the short run. This is unwelcome news for more traditional, strategic asset allocators, as opposed to higher frequency traders.”
A report by institutional crypto brokerage Copper this month showed global exchange reserves of Bitcoin -- an indicator of what’s available to be sold to traders -- reached new lows at the end of January, which the firm’s head of research Fadi Aboualfa said signaled that the cryptocurrency may have found a “fundamental bottom” within its current price range.
Craig Erlam, senior market analyst at Oanda, said in an email that while crypto is usually expected to trade as a high-risk asset, “during some of the more volatile and negative periods in the markets, they’ve shown some real resilience which isn’t necessarily what you’d expect.”
“Perhaps this is HODLers flexing their muscles after such a huge selloff, with $30,000 widely viewed as a big level. Or maybe given the latest Russian sanctions and turmoil in Ukraine, some are seeing a window for crypto. It’s hard to say at this stage,” Erlam added.
