On Tuesday, Bitcoin’s price surpassed $26,000, prompting crypto traders to assert that the recent surge in digital asset prices marked a significant shift in momentum. According to some on Crypto Twitter, the spike in Bitcoin’s price signifies that digital assets are diverging from other risk assets, such as stocks, with some dubbing it “The Great Decoupling.”
You’re witnessing the decoupling. Bank stocks implode globally and Go to Zero. Crypto SOARS !!! 🚀🚀🚀🚀🏝️🏝️😎😎💥💎🥜
— Christopher Greene 😎🏝🚀⛵️ (@amtvmedia) March 13, 2023
The Great Decoupling is under way #bitcoin
— The Bitcoin Mindset 🟠 🧠 (@thelevelupexp) March 13, 2023
Throughout much of last year, digital assets and equities moved in similar directions as a result of an economic slowdown and tightening monetary conditions fueled by the Federal Reserve’s aggressive series of interest rate hikes. However, despite the short-term surge in crypto, it is still too early to conclude that the correlation between digital assets and other assets has been broken, due to the Federal Reserve’s monetary policy stance, which continues to be a significant factor in today’s markets, according to Nauman Sheikh, Managing Director of Wave Financial.
“I wouldn’t say the correlation has broken down,” he said. “[Traders are] focused on the idea of decoupling because they’re all looking for a reason for the space to rally.”
Although Bitcoin has risen by 56% since the start of the year, compared to a 9.6% increase in the Nasdaq Composite and a 2% increase in the S&P 500, the correlation between crypto and stocks is still noticeable. “I would say it’s still too early, as I expect initially all risk assets to move in tandem if the Fed does pivot,” said Lucas Outumuro, Director of Research at IntoTheBlock. “But a few weeks later, it could begin to be less correlated as the largest macro headwind eases.”
According to IntoTheBlock’s correlation matrix, Bitcoin’s correlation with the Nasdaq and the S&P 500 has actually increased over the past week, from -0.23 and -0.28 to 0.24 and 0.33, respectively. Correlations are often calculated in such a way that a value of 1 indicates that two things always move in the same direction, while a value of -1 indicates the opposite.
Despite Bitcoin’s positive correlation with the S&P 500 and Nasdaq, the measure has decreased since Jan. 31, when Bitcoin’s correlation with the S&P 500 was 0.85 and 0.92 with the Nasdaq. Outumuro noted that the recent increase in digital asset prices is partly due to events such as an inflation report released on Tuesday and the possibility of the Fed halting interest rate hikes following the collapse of Silicon Valley Bank last week. These events also favored stocks, and “crypto being further out the risk curve is benefiting [it] disproportionately,” he said.