Crypto and stocks share strongest positive correlation in years after Fed rate cut: Bloomberg

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The Block2024/09/22 16:00

By:The Block

Quick Take Cryptocurrencies and U.S. stocks are now more closely aligned than at almost any time in recent years, according to a Bloomberg report on a new correlation study. This increasing positive correlation suggests that macroeconomic factors, particularly following last week’s Federal Reserve rate cut, are significantly influencing both markets, the report noted.

The positive correlation between cryptocurrencies and the SP 500 has risen to levels not seen since mid-2022, according to Bloomberg data. This close relationship in price movements indicates that macroeconomic factors influencing U.S. stocks are significantly impacting the cryptocurrency sector as well.

The Bloomberg report indicated that the 40-day correlation coefficient between a gauge of the largest 100 cryptocurrencies and the SP 500 now stands at about 0.67, a level only surpassed in the second quarter of 2022 when it reached 0.72. In the second quarter of 2022, bitcoin dropped to approximately $19,000, which coincided with the SP 500's fall to 3,674.84 points. The equity index has now increased 35% since that time to a current record high of 5702.55 points. Bitcoin BTC +0.67% has appreciated since that time by 69% to a current price of around $63,500.

The data from Bloomberg aligns with a recent report from Coinbase analysts David Han and David Duong, who put bitcoin's correlation with the SP 500 at a slightly higher value of 0.69. A correlation coefficient of 1 indicates a perfect positive correlation. Conversely, a coefficient of -1 signifies a perfect negative correlation, while a coefficient of 0 indicates no correlation.

FalconX Head of Research David Lawant stated that the positive correlation between equities and cryptocurrencies is expected to persist, especially as indicators suggest the U.S. economy may be heading toward a soft landing. This scenario occurs when monetary policy effectively curbs inflation while sustaining economic growth and avoiding a recession. "Correlations between crypto prices and broad risk asset indices have been on the rise and are likely to remain elevated for a while," Lawant said in an email sent to The Block. He added that a lower interest rate cycle, combined with a soft landing, is currently the base-case scenario for most investors, and would create a novel macro environment for crypto.

"The combination of a favourable election outcome and a more favourable liquidity environment for risk assets could start the next crypto bull market," Lawant added.

Risk assets post upward trend following the recent Fed rate cut

Galaxy’s Head of Liquid Active Strategies and Portfolio Manager Chris Rhine highlighted the consolidation in both risk assets and cryptocurrencies, positioning both markets favorably for an upward trend. He noted that positive catalysts are outnumbering negative ones, particularly as risk assets reacted positively to the Federal Reserve's recent 50 basis-point rate reduction, with digital asset prices also rising as anticipated due to the easing monetary policy.

Additionally, he mentioned that the narrative surrounding the upcoming U.S. presidential election has shifted toward becoming a more positive catalyst, especially after presidential candidate Kamala Harris pledged at a fundraiser over the weekend to support the growth of the crypto sector. This development is complemented by Anthony Scaramucci and other crypto advocates collaborating on her campaign’s crypto policies.

"Optimism is building that Vice President Kamala Harris’ stance on crypto will be more favorable than the Biden administration's policies, offering a more optimistic regulatory and legislative roadmap for the industry. It is very likely that more large wealth management platforms will approve Bitcoin ETFs in early Q4, further expanding access to digital assets across the trillions of dollars of wealth managed by brokerage firms," Rhine said.

Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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