BTC vs Stocks

The leading cryptocurrency, Bitcoin, is trading sideways, maintaining a narrow trading range of $18,950 to $19,765 amid a lack of volatility. Bitcoin’s volatility has decreased over time as the asset has gained popularity. When comparing the current state of the top cryptocurrency to its early years of acceptance, institutional capital inflows have also contributed to its relative stability.

This, however, has the unintended consequence of causing an asset to move more in line with traditional markets. With this year’s increase in correlation between Bitcoin and the stock market, it has come a long way from its previous periods of volatility.

Bitcoin Steady, While US Indicies on a Losing Streak

For the first time since the 2008 Financial Crisis, the S&P 500 and Nasdaq Composite ended the week down for three consecutive quarters on Friday. At the same time, the Dow Jones Industrial Average had three straight quarterly losses for the first time since 2015.

Bitcoin is also on a losing streak, but it’s a bit steady compared to stocks. Check out a yahoo finance comparison among DJIA, SPX, NASDAQ, and BTC. 

Comparison

DJIA, SPX, NASDAQ, and BTC  Comparison – Source: Yahoo Finance

According to data provided by Compound Advisors’ Charlie Bilello, the current decline in the benchmark S&P 500 is the longest from high to trough since March 2009. Since 1929, bear markets have averaged 14 months in length, making the current one the longest at 8 months.

The percentage of retail investors who have a negative outlook on the stock market (as measured by the American Association of Individual Investors) has risen to 60%, the highest level since 2008 and the eighth most gloomy reading in the survey’s 35-year history.

Let us now consider why the Bitcoin price has become less volatile than stock prices.

A Surge in US Dollar’s Value

Beginning the fourth quarter of 2022, the US dollar is supported by the same fundamentals that have pushed it higher against major currencies for most of the year. There is essentially nothing that can stop the dollar from making even more gains.

The rising US dollar impacts other currencies, destroying stock portfolios and crashing commodity prices. However, one asset, Bitcoin, has been relatively stable over the last week. The cryptocurrency has increased by 6.5%, an unexpectedly strong run that has attracted the attention of both bulls and bears in the market.

Sven Henrich, the founder of market research firm NorthmanTrader, tweeted, “You know we’ve reached a unique point in history when Bitcoin suddenly becomes less volatile than fiat currencies.”

During the most recent bull market, Mr. Henrich was a prominent bear, expressing concerns about overvalued assets such as cryptocurrency.

Bitcoin Under Pressure, Higher Inflation in Play

For consumers and the Federal Reserve, a strong currency is a brake on inflation, which is still uncomfortably high. The US Labor Department data released on September 13 show that the annual inflation rate in the United States is 8.3% for the 12 months ending in August 2022, down from 8.5% the year before.

The next inflation report will be released on October 13.

Inflation

US Inflation Rate – Source: usinflationcalculator.com

Stronger inflation triggers a rate hike, driving an uptrend for the US dollar. Since there’s a negative correlation between Bitcoin and the US dollar, Bitcoin will likely lose more than half its value by 2022, outperforming most other currencies, stocks, and bonds.

As interest rates rose due to inflation, Bitcoin followed the trading patterns of riskier assets such as technology stocks. This has not always been the case over the last month.

Correlation

Bitcoin vs. Nasdaq Correlation – Source: Tradingview

Despite a strong correlation between Bitcoin and the Nasdaq, BTC hasn’t seen much movement and has been trading sideways. Bitcoin’s value has risen since September, while the Nasdaq has fallen by about 10%. As a result of the high inflation, the stock is now more volatile than BTC.

Furthermore, Bitcoin’s value increased in September, rising at the start of the month before falling significantly in the middle due to higher-than-expected inflation reports in the United States.

US Fed Rate Hike & Hawkish FOMC

Even though Bitcoin and Ethereum have performed poorly for three straight quarters this year, many analysts are still shocked at how strong they are now. Over the last week, when other assets have collapsed, the tokens have remained remarkably stable. This year, the Fed has raised interest rates five times.

In sum, the central bank is attempting to cool the economy to control growing prices. Cryptocurrency has a history of responding negatively to Fed rate increases. The Fed most recently increased rates in September by an additional 75 basis points, and minutes following the announcement, Bitcoin values changed.

US Fed Rate

Fed Fund Rate – Source: Federal Reserve

However, the cryptocurrency market’s reaction was not as strong as in recent months. This is because the cryptocurrency market predicted the Fed’s most recent move and factored in the risk in the price.

Most notably, the stock market crashed last week after the Federal Reserve announced that interest rates would be raised for the sixth time this year. It raises the stock’s volatility above that of BTC.

Bitcoin Pump Coming?

Given all of the above fundamentals, Bitcoin is trading choppy amid market risk-off sentiment. However, as soon as the US Federal Reserve stops raising interest rates, the market will shift back in favor of cryptocurrencies, particularly Bitcoin.

Therefore, we should keep an eye on US fundamentals to determine Bitcoin price action. Check out Bitcoin price prediction to get a sense of the currency’s future prospects.

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