After a strong rally in the crypto market over the past week, the correlation between US equities has decreased. As of this writing, BTC’s 30-day correlation stands at 0.29, a level not seen in over a year. The softening correlation, which implies the decreasing relevance of the American markets to crypto, is generally considered a positive development.
What Factors Affect Bitcoin’s Correlation with Equities?
In a recent report, Vetle Lunde, a Senior Analyst at Arcane Research, identified four factors that generally impact the correlation between BTC and US stocks. These include institutional investors bundling BTC with other risk assets, growth companies holding BTC, selling pressure from miners, and a low interest rate environment.
However, developments in 2022 have led to almost all of these factors changing course. For example, companies like Tesla (NASDAQ: ) and miners don’t have much Bitcoin left as they have already unloaded some of their properties. In contrast, aggressive rate hikes by the Fed have ended a period of nearly a decade of loose monetary policies. Monday said:
“Compared to 2022, public companies hold much less BTC, miners have less BTC to sell, and many institutional players have left the market. All these factors are in favor of softening the correlations going forward.”
It should be noted that certain market events can lead to an increase in the correlation between BTC and US stocks. After it was announced that it would cool down to 6.5% in December, BTC followed US equities in close tandem. However, the top cryptocurrencies managed to avoid losses as the US markets closed.
Bitcoin and the broader crypto market rallied during the Asian hour after FTX fell. According to Arcane, the crypto market saw a 16% upside during Asian time versus 10% during US time. However, correlations matter during US trading hours.
The Crypto Market Will Probably Stabilize After a Recent Rally
Over the weekend, crypto-currencies rose higher in one of the most impressive demonstrations in about a year. Major cryptocurrencies broke above key resistance levels and extended their rallies, with the crypto market capitalization approaching $1 trillion, a level not seen since November last year.
Bitcoin, the world’s largest cryptocurrency, reached a high of over $21,500, while it climbed to around $1,600. Both coins have gained about 20% in the past week. , , and are the best performers among the top 20 cryptos, gaining about 35% in the last seven days.
However, Arcane believes that the crypto market will stabilize in the short term. In recent days, the Binance stock has seen several strong pullbacks that coincide with market strength as shorts are covered.
“Currently, shorts do not provide much impetus to push prices higher in the short term. Open interest has stabilized, with no noticeable growth after BTC recovered above $20,000, indicating that short traders they learned from last week’s unsuccessful efforts.”
Meanwhile, Bitcoin is trading around $21,200, essentially flat over the past day. Ethereum is also hovering around the $1,500 mark, while Shiba Inu is up about 20% in the past day after short bets worth nearly $790,000 were liquidated.
***
This article was originally published on The Tokenist. Check out The Tokenist’s free newsletter, Five minute financefor weekly analysis of the biggest trends in finance and technology.