- Bitcoin's correlation with traditional markets is declining.
- However, downside risks for BTC prices, such as recession, still remain.
NEW DELHI (CoinChapter.com) — Bitcoin (BTC) seems to be returning to its digital gold narrative as the token’s correlation with the traditional financial markets decreases.
As COVID-19 wrought havoc on the global economy, investors turned to cryptocurrencies as an alternative investment option.
With institutional investors entering the Bitcoin market, the cryptocurrency’s price action mimicked traditionally risky assets like equities, shares, etc. However, in its recent report, the crypto analytical platform Ecoinometrics noted that Bitcoin’s correlation to the SP500 is ‘slowly coming down.’
But the firm was quick to warn traders to stay cautious. “Unless Bitcoin starts to decouple from risk assets seriously, it is worth staying cautious,” the firm noted.
In 2021, the correlation between BTC and traditional markets grew so that the crypto’s digital gold narrative came under question, most famously during China’s Evergrande sell-off.
Safe to say, BTC has started behaving more like a risk-on asset. The correlation is bad for Bitcoin prices, especially given the current geopolitical environment. Russia’s war with Ukraine, and the resulting sanctions on the former Soviet Union, have destabilized the global financial markets.
Thus, if BTC’s correlation with the traditional financial markets grows stronger again, Bitcoin might lose investors’ faith in its value as a safe-haven asset. In addition, the Federal Reserve is struggling to control inflation, adversely affecting the traditional financial market.
A highly correlated Bitcoin would also suffer the consequences of a troubled global market.
Bitcoin Prices In Danger From A Likely Recession
Equity trading did not begin the current year on the right note, but it now seems that the market upheaval is just getting started.
Reigned-in inflation is not visible on the horizon, which means the Fed would deal with the situation by either printing more money or raising interest rates. Increased interest rates encourage people to keep their money in banks, removing currency from circulation and increasing purchasing power.
The U.S. central bank is working on tightening its balance sheets, and at the same time, it has raised short-term rates. However, the inversion of the U.S. treasury yield curve indicates a potential recession.
Under usual conditions, the yield from a long-term bond is higher than short-term yields. However, bonds with shorter time limits offering better returns than long-term bonds indicate that the U.S. treasure yield curves have inverted.
Interestingly, the bond market witnessed a brief inversion just before Covid-19 hit. The U.S. economy was on shaky grounds before the pandemic’s arrival. A recession at this time would leave Fed with very little time to maneuver.
Bitcoin prices would likely become a victim of the recession as well. In addition, the token’s correlation with the traditional market could see BTC prices fall alongside shares, bonds, etc.
Not All Hope Lost
Despite its high correlation with the traditional markets, Bitcoin’s price has been doing well. Moreover, despite the ongoing Russia-Ukraine war threatening economic development and financial movement globally, BTC prices have remained relatively neutral.
BTC failed to consolidate near $50,000 in 2022, going as low as $33,000 at one point. However, Bitcoin recovered and is currently trading above $45,000, considered a key resistance level earlier. As a result, BTC has recovered most of its losses in 2022.
Moreover, Terra’s Luna Foundation Guard’s plans to buy $3 billion (nearly 66,667 BTC at current prices) worth of BTC has also helped Bitcoin prices. Institutional interest in the token continues to grow.
Bitcoin’s price movement highlights the token’s ability to perform well despite macro risks on a global scale. As a result, BTC could still become a safe-haven asset in times of global financial crisis.