Crypto Coins and Stocks Grow Increasingly Correlated

After the beginning of the pandemic, the correlation between the stock market and cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) has grown, indicating that their movements are increasingly in tandem.  The long-held belief that cryptocurrencies are uncorrelated assets is slowly being dispelled, and the latest data corroborates this assertion. A recent report by Bloomberg revealed that the correlation coefficient of ETH and the S&P 500 reached a 40-day high of 0.65, while Kaiko reported a correlation coefficient of 0.58 for BTC earlier last month.  On a scale of -1 to 1, with 1 being completely matched and -1 being opposing directions, a clear pattern has emerged.

The prevailing opinion on what's shaping these market movements is the Fed’s impending interest rate hikes coupled by the CPI inflation for 2021.  Immediately following the release of the Fed’s December minutes, traditional assets went into a downward trend and crypto was quick to follow.  BTC suffered significant losses as did ETH and the entire altcoin market.  The inevitable interest rate hikes, set to begin in March, present a hawkish Fed agenda and have sent investors to seek refuge among safer assets. 

Despite the evidence to the contrary, supporters of cryptocurrencies insist that the coins remain a safe-haven asset like gold, and can hedge the oncoming inflation.  It’s premature to determine whether or not this pattern of correlation will hold, however, it’s also important to point out that much of cryptocurrency’s legal ambiguity heavily contributes to its recent struggle and volatility.  With an executive order on crypto expected later this month, many investors are waiting to see how the government will define and regulate the space moving forward.