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- First Republic is the latest US bank to fail.
- Bitcoin rallied this week, just like it did in March when the SVB collapsed and a banking crisis erupted.
- Our research leader Dan Ashmore confirms that bitcoin remains a risky asset despite groundbreaking claims from enthusiasts.
- Stock market correlations remain high, he wrote, citing changes in interest rate policy expectations as the reason for bitcoin's surge.
Recently, there has been talk (again) in the market about separating bitcoin from stocks. Something about Bitcoin offering an alternative store of value beyond the realm of fiat currency, an offering that has suddenly soared in value as the banking turmoil gripping the US continues.
Let me start by saying that I don't think my opinion here is entirely correct. I can't predict the future. But I would like to see the numbers because I think they prove that this theory on which Bitcoin is based is objectively wrong.
I wrote a detailed account of the relationship between bitcoin and stocks in March, when this theory originally emerged as Silicon Valley banks collapsed and bitcoin skyrocketed. The same logic applies now, so I'll try to summarize by updating the same numbers.
And a quick note. This article is not about my beliefs about Bitcoin's long-term path. Whether Bitcoin will evolve in the future and become a store of value like gold uncorrelated to other risk assets is a discussion for another time and I won't go into detail here. I am looking forward to today's price action and say that since May 2023 bitcoin has been trading as a very risky asset, away from this inconsistent view.
Bitcoin's relationship with the Nasdaq stock exchange
A natural place to look is tech stocks, which are among the riskiest sub-sectors in the equity world. The Nasdaq is often considered the industry benchmark for technology indexes. We then plot Bitcoin's relationship with the Nasdaq over the past two years.
Using Pearson's 60-day scale, the graph shows that the ratio has recovered significantly over the past two years. However, overall it shows a relatively strong correlation, often exceeding 0.5.
There are some downfalls. The first apparently occurred in May/June 2021, when bitcoin dropped from $63,000 to $31,000 for no apparent reason, then recovered in the 60s that same year.
The second significant decline in the ratio occurred in November 2022. It was none other than the collapse of FTX, a spectacular collapse that shook the cryptocurrency industry. At the same time, equities rallied significantly on the back of weak inflation data and growing optimism about the future path of interest rates. A sign of a significant decrease in the coefficient.
Consequently, there were two very significant and significant periods of decorative relations; Both occur during a cryptocurrency meltdown, regardless of the stock market. If you take a close look at the past year - I've shown last year's report below - you'll notice another big difference in the summer of 2022, when cryptocurrency bank Celsius will close its withdrawals.
More importantly, the links come back quickly every time. Including in March when Bitcoin pulled back due to the banking crisis.
But is it really beyond March? That ratio remains relatively high, certainly not as high as previous installments of The Decorator Case and others. Of course, bitcoin surged higher than the Nasdaq after SVB, but it also fell short of securing deposits backing the second-largest stablecoin, USD Coin. In effect, Bitcoin did what it used to do: sell more aggressively and then bounce back stronger. Because it's more dangerous.
Also, the elephant in the room is the Federal Reserve. The market has deviated from Fed policy expectations throughout the year and that is the real reason for the move in March and this week.
The market reaction to the SVB collapse was the announcement of a massive liquidity injection by the Fed, as well as predictions that interest rates may not rise significantly in the future due to the bad banking system. Both are good for risk assets, and thus bitcoin has rallied. Again, not due to the possibility of fiat system failure.
Not to mention that these banking problems are caused by long-term risk management, which is very different from PFG's banking problems in 2008, when there was a total bankruptcy crisis based on bad underlying assets (mortgage loans) . Today the banking crisis is still a crisis, but it is a regional one, fueled by the most aggressive growth cycle in recent history, as bank asset values plummeted and deposits were withdrawn to take advantage of these high interest rates elsewhere. leads to an unstable situation; Banks react when trust fades.
We saw similar developments again this time when the First Republic Bank collapsed last week after reporting that it received more than $1 billion in withdrawal requests in the recent quarter.
Once again, the market has responded to this outbreak by saying, “Well, the Fed can't raise anymore. This is great for risky assets." Looking at the Fed's odds, expect a 25 basis point rally today (May 3) and then… nothing. The market sees this as the ultimate rally.
Therefore, it is important to pay attention to the underlying variable (interest rate policy) when evaluating correlations and trying to understand why bitcoin is moving. So far, the numbers are pretty clear and the bottom line is clear: Bitcoin is being traded as a risk asset. We probably don't even need to consider the ratio. Take a look at the chart below, which shows bitcoin's performance against the Nasdaq since early 2022. Are you sure you mean these assets are uncorrelated?
The numbers speak for themselves. Again, this is not a prediction of what will happen in the future. Tomorrow bitcoin can reach $1 million and the Nasdaq can go down to zero, I don't care. Bitcoin could one day catch up with this free store of value. But for now the numbers speak for themselves. it is traded as a risky asset.