The winds of change are blowing through the crypto market as a familiar pattern reemerges – the correlation between Bitcoin and the S&P 500. This rekindled relationship, which had seemingly dissipated in the wake of Donald Trump’s election victory, is now back in the spotlight, raising questions about its implications for the world’s largest cryptocurrency.
The Bitcoin-S&P 500 Divergence
Since Trump’s ascension to the presidency on November 5th, Bitcoin has surged an impressive 47%, far outpacing the S&P 500’s modest 4% gain over the same period. This divergence can be attributed to several factors:
- Trump’s pro-crypto stance: The incoming president has made no secret of his friendliness towards Bitcoin and cryptocurrencies.
- Republican control of Congress: With the GOP securing a majority in both the Senate and House, the stage is set for potentially favorable crypto legislation.
- Macro factors weighing on stocks: The Federal Reserve’s hawkish rate cuts in December have dampened sentiment in traditional financial markets.
Andre Dragosch, Head of Research at Bitwise in Europe, shed light on these dynamics in an exclusive interview with CoinDesk:
“My view on bitcoin versus S&P 500 is that the stock market has been negatively affected by the Fed’s hawkish rate cut in December. The Fed revised its planned rate cuts for 2025 to 2 rate cuts only, less than previously telegraphed and also less than previously anticipated by traditional financial markets.”
– Andre Dragosch, Bitwise
Meanwhile, the DXY index, which gauges the U.S. dollar’s strength against major currencies, has climbed 5%, exerting additional pressure on risk assets. Typically, this would also weigh on Bitcoin, but Dragosch points out that BTC has held up relatively well thanks to other supportive factors like the ongoing supply deficit on exchanges.
Exchange Balances Paint a Bullish Picture
Declining Bitcoin balances on exchanges, even in the face of profit-taking, suggest a robust underlying demand for BTC. Dragosch elaborated:
“Bitcoin exchange balances have continued to drift lower despite profit-taking.”
– Andre Dragosch, Bitwise
This trend, visualized in the chart below from Glassnode, bodes well for Bitcoin’s price outlook from a fundamental perspective.
The Return of the Bitcoin-S&P Correlation
However, the reemergence of Bitcoin’s correlation with the S&P 500 in recent weeks is a cause for concern. Over the most recent 20-day period, the correlation coefficient between the two assets has climbed to 0.88, as per TradingView data. A coefficient of 1 indicates a perfect positive correlation, while 0 denotes no correlation at all.
This tightening relationship could expose Bitcoin to short-term downside risks, especially given the uncertain macroeconomic backdrop. Dragosch concluded:
“While on-chain factors will likely provide a significant tailwind at least until mid-2025, the deterioration in the macro picture could pose short-term risks for bitcoin as well, especially on account of the still relatively high correlation with the S&P 500.”
– Andre Dragosch, Bitwise
Navigating the Crypto Market Headwinds
As the crypto market grapples with this complex interplay of correlations, macroeconomic forces, and on-chain dynamics, investors will need to tread carefully. While Bitcoin’s fundamentals remain strong, the near-term picture is clouded by the resurgent stock market correlation.
Navigating these choppy waters will require a keen eye on both traditional financial markets and the crypto-specific factors that have propelled Bitcoin to new heights in the post-Trump era. Only time will tell if BTC can decouple once again from the S&P 500 and chart its own course in the months ahead.
