Bitcoin hits $47.5K but its correlation with U.S. equities spells extreme selloff risks

YEREVAN (CoinChapter.com) – Bitcoin (BTC) wobbled around $47,000 Monday, after closing the weekend at a year-to-date high of nearly $47,800. Additionally, it broke a significant resistance that hindered its upside moves since the year’s start.

The BTC/USD price action pumped above its 200-day exponential moving average (EMA-200). Thus, should retracement occur, Bitcoin could retest the said resistance and the EMA-200 as support.

However, Bitcoin bulls might not have much time to celebrate. The digital asset’s correlation with the equities market and the upcoming interest rate hikes could dampen the bullish claim. But before addressing the crypto market concerns, it is essential to understand inflation’s role in Fed’s fiscal policy.

Fed vs. Inflation

Notably, the Federal Reserve’s increase in interest rates is a tool to keep inflation in check. According to the U.S. Bureau of Labor Statistics’ February report, inflation rose 7.9% year-over-year. Moreover, the consumer price index (CPI) increased an additional 0.8% since Jan, with energy and crude oil prices leading the pack.

Citigroup Inc. economists now see four straight half-point moves in addition to the quarter-point advance earlier in March. As a result, the experts asserted that “risks to the terminal policy rate remain to the upside given the upside risk to inflation,” abandoning their initial call for two percentage points of hikes in 2022.

Also read: Bitcoin rallies over $41K after Fed raises interest rates — but a BTC selloff appears likely. 

Moreover, New York Fed President John Williams backed the aggressive policy and said that it should if the central bank needed to raise rates by a half-point. As a result, Bank of America Corp. economists upped their interest rate hike forecast, expecting a quarter-point hike in May followed by two half-point moves before the year’s end.

What about the stock market and Bitcoin?

When the Federal Open Market Committee (FOMC) changes the interest rate, it impacts both the economy and the stock markets. However, while the broader economy could take months to respond, the impact on the stock market is typically more immediate.

Higher interest rates tend to affect earnings and stock prices negatively. Additionally, as CoinChapter previously reported, the alpha crypto positively correlated with the risk assets, such as the stock market in the previous months.

Thus, if the equities tumble, they could take Bitcoin down for the ride, erasing the recent gains. As a result, the flagship cryptocurrency’s upside move is in danger if the risk-asset correlation stands strong. Some traders share the outlook given the lower trading volumes against the rising value.

Also read: Fed to hike interest rates despite ongoing war in Ukraine – Will Bitcoin benefit?

BTC rally might be short-lived

Moreover, crypto analytical platform Ecoinometrics backed the bearish forecast, calling for “no aggressive strategy” and “no leverage.”

Nice #Bitcoin pump.

But given the macro backdrop I'll feel really safe only after Bitcoin's correlation to the stock market starts falling down.

Until then imho stacking sats, no aggressive strategy, no leverage is the way to go.

📉🧐👇 pic.twitter.com/SbROm1B8TN

— ecoinometrics (@ecoinometrics) March 28, 2022

Ecoinometrics further added that since the Covid-19 related market crash two years prior, BTC’s correlation with the risk assets has been growing.

Seeing BTC move back to its long-term status of an uncorrelated asset would do a lot to strengthen the store of value narrative.

asserted the platform.

Also read: Bitcoin drops alongside risky assets, Gold steady as Fed confirms aggressive rate hikes. 

Moreover, according to Arcane Research’s weekly newsletter, “Bitcoin’s correlation to the S&P 500 has only been higher for five days in BTC’s history, showing that the current correlation regime is unprecedented in BTC’s history.”

Thus the mentioned correlation and the tightening of the U.S. Treasury yield curve might rain on Bitcoin’s parade. The economy might destabilize from the rapid-fire interest rate rises, bringing the crypto market down, shattering its safe-haven status.