Key Takeaways:
- Bitcoin's correlation with the stock market might be hinting at bearish risks for the prime crypto.
- SPX price is testing a key support level, failure of which could result stock markets crashing.
NEW DELHI (CoinChapter.com) — Bitcoin (BTC) price might head for bearish pastures if S&P500 (SPX) fails to hold on to key support level. The prime crypto’s positive correlation with the traditional financial markets has tied BTC’s fate with the traditional markets.
In early Jan 2023, BTC’s weekly correlation with SPX reached its lowest since Aug 2021. Since then, the BTC-SPX weekly correlation has started rising and is currently at 0.32. Positive correlation refers to when the price action of two assets mirrors each other.
SPX price flipped a multi-month descending trendline resistance in late Jan 2023. However, the rally soon fizzled out, and the index has now dropped to retest the resistance as support. Market analysts opine that the recent surge in traditional markets might not last long.
Why The Recent SPX Rally Might Be A Bubble
Ruchir Sharma, chairman of Rockefeller International, wrote in the Financial Times that the recent surge “had all the hallmarks of an echo bubble.”
An echo bubble is a post-bubble market rally that results in a smaller bubble. Deemed the “everything bubble,” rising inflation popped the bubble in late 2022. After that, however, speculation of slowing interest rate hikes and tech and crypto assets started bounding back over the past three months.
Also Read: Bitcoin Price Signals Bearish Continuation As The Bulls Face Uphill Task
Moreover, stock buybacks by firms in the S&P 500 might have been key to the index’s recent rally. Per a Goldman Sachs analysis, stock buybacks might top $1 trillion in 2023. Moreover, by Feb 17, S&P 500 firms had bought $220 billion of their shares, setting a new record.
However, the current economic outlook forced investors to lower their expectations of a dovish Fed policy, forcing SPX to trim its YTD gains. As a result, the index, which tracks the price action of 500 large companies, painted three consecutive bearish weeks.
How A SPX Crash Might Impact BTC
Bitcoin and S&P 500’s recent price action seems reminiscent of the two assets’ performance during the Mar 2020 stock market crash.
During the last quarter of 2019, BTC price dropped to $6,900 within weeks, while the SPX price kept rising.
However, uncertainty over the possible impact of the Coronavirus pandemic and the global economic downtrend combined with the fall in oil prices triggered one of the largest crashes in stock market history.
Only two other times (1914 and 1987) in stock trading history have the markets witnessed such massive declines in a single day. Meanwhile, the SPX-BTC correlation had been rising, reaching 0.22 on the weekly timeframe.
In late Feb, SPX and other indices painted record weekly declines. As a result, fear became the dominant market sentiment, causing investors to dump any risky assets, including Bitcoin and other cryptos.
Bitcoin’s correlation with the traditional financial markets rose sharply as BTC prices fell in tandem with the stock market. For example, between Feb 3 and Mar 9, BTC prices dropped by nearly 50% to $5,300 before recovering.
A similar BTC price action might occur if SPX fails to hold above its key support, warned crypto investor Teddy Cleps.
In a Twitter post, Cleps stated that a crypto market pump depended on SPX price successfully testing its recently flipped resistance. A positively correlated BTC might crash if SPX’s support fails, pulling down the wider crypto market.
