Bitcoin and stock market correction

Historically, the price of bitcoin has often correlated with technology stocks

For example, the 30-day moving correlation coefficient between Bitcoin and the Nasdaq 100 (NDX) is 93% as of May 23, 2022. On most days, Bitcoin (BTC) and NDX move similarly.

Critics often refer to this correlation as a fundamental flaw. They argue that bitcoin should not move in the same direction because it is meant to be a hedge.

Bank Analyst of America recently used this fact to claim the following (according to Business insider):

“Bitcoin does not protect against inflation. Moreover, its correlation with gold is nearly zero, and its ties to the stock market are near all-time highs”.

Sceptics who use this line of reasoning miss a few key points:

• First, bitcoin is not designed to hedge stocks. It’s more about put options. Second, Bitcoin is a hedge against inflation, financial censorship, and monetary shocks. A rare, apolitical economic asset;
• Second, critics who use this argument ignore that over the past 5 and 10 years, bitcoin has significantly outperformed tech stocks. While it may move in the same direction as tech stocks, BTC has historically generated returns several times the Nasdaq 100. On longer timescales, Bitcoin is a fantastic hedge against inflation.

Comparing the price of bitcoin and the Nasdaq 100 stock index over the past five years (as of May 24, 2022) indicates the superiority of Bitcoin.

Over the past five years, Bitcoin has surpassed the Nasdaq 100 by about six times. The downside is that bitcoin lagged behind tech stocks during the correction. For example, Bitcoin has lost several percentage points over the past year compared to NDX. And the period from the peak of Bitcoin in January 2018, around $20,000, to a low of $4,000. So this was not a good indicator for the asset.

If technology stocks continue to fall, bitcoin may continue to correct. But bitcoin has a unique catalyst that could keep it outperforming equities in the medium to long term: inflation.

One explanation for why Bitcoin often moves in tandem with technology is that both prices are affected by the Federal Reserve (Fed) actions and its perceived economic impact.

If the market thinks the Fed is about to raise interest rates and end QE, it shouldn’t surprise anyone that tech stocks and Bitcoin are correcting. Higher interest rates can hurt the economy.

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