In the wild west of cryptocurrency markets, a new sheriff may be emerging to challenge the reign of stocks as the sector’s dominant macro influence. A fresh report from banking giant Citi suggests that while equities remain the most important external driver of crypto prices for now, their outsized impact is likely to diminish over time as digital assets mature.
Stocks Still Steering the Crypto Ship, For Now
The Citi team, led by analyst Alex Saunders, pulled no punches in emphasizing the current primacy of stock market moves in shaping crypto price action. “Equities have been and remain the most important macro driver of crypto markets,” the report flatly stated. This conclusion aligns with the experience of many crypto traders who have seen their portfolios rise and fall in lockstep with the whims of Wall Street.
However, the researchers were quick to caveat that this intimate inter-market tango may not endure indefinitely. Citi predicts that the “equity-crypto correlation is likely to fall over time as the nascent asset class matures, the investor base grows, technology advances and adoption progresses.” In other words, as crypto evolves from a speculative sandbox into an established pillar of finance, it may start marching more to its own beat.
Regulatory Clarity as a Decoupling Catalyst
One key factor the bank identified as potentially accelerating crypto’s decoupling from stocks is an improved regulatory landscape, especially in the US. Citi posited that “a more transparent regulatory regime in the U.S. will also lead to more idiosyncratic price action.” The logic goes that as authorities provide guardrails and dispel uncertainty around the legal status and treatment of digital assets, crypto markets will trade more on their own fundamentals and unique adoption curves rather than merely riding on the coattails of equity risk appetite.
Volatility and Institutional Uptake
Crypto’s infamous volatility was another area where Citi saw room for evolution. The report opined that bitcoin volatility is expected to continue to fall in the long term as institutional adoption grows. More deep-pocketed investors making longer-term allocation decisions could help tame some of the asset class’s trademark turbulence and further distance its behavior from the stock market.
The speculative nature of cryptocurrency markets means that risk asset correlations may be inflated, especially during risk-off events.
– Citi Report
Still, the researchers acknowledged that crypto’s innate properties as a “risk asset” mean that correlations to equities could spike during market downturns when investors rush for the exits. This tendency may preserve some degree of equity linkage even as the broader correlation weakens.
Crypto Expanding Its Market Presence
In a striking data point, Citi noted that crypto was the only asset class whose market cap grew versus US stocks last year, even as most risk assets suffered. This resilience in the face of a challenging macro climate points to crypto’s unique adoption dynamics and ability to swim against the broader market tide on the strength of internal factors like technological progress and expanding use cases.
- Crypto’s market cap grew vs US equities in 2022, bucking the risk asset downtrend
- Bitcoin’s correlation to gold is also worth watching as a barometer of its “store of value” appeal
The bank also flagged bitcoin’s evolving correlation to gold as a metric to monitor, suggesting that rising co-movement with the yellow metal could signal progress in BTC’s quest to establish itself as a viable “store of value” and inflation hedge. An increase in this correlation would also, almost by definition, imply a decrease in bitcoin’s correlation to stocks.
The Path to Crypto Independence
Ultimately, the Citi report paints a picture of a crypto market that is not yet fully mature but is making significant strides in that direction. The predicted decline in equity correlation and sensitivity to idiosyncratic adoption and regulatory factors should pave the way for crypto assets to carve out their own distinct identity in the financial universe, even if they never completely sever their risk asset roots.
In the meantime, crypto investors will likely still need to keep one eye on the stock market for potential potholes even as they devote more focus to the industry’s internal growth drivers. As they await the crypto / equity decoupling, they can take heart that some of the smartest minds on Wall Street see that milestone on the horizon. When a major player like Citi starts pointing to crypto’s coming of age as an independent force, it may be time to start planning for a new market paradigm.
