Bitcoin Bucks Wall Street Jitters After Hot Inflation Reading — But Correlation Still Rising

Bitcoin’s correlation with the S&P 500 is growing stronger, but newly-listed ETFs change that

By: André Beganski

February 14, 2024

A hot inflation report jolted investors on Tuesday as stocks and crypto dropped on dampened rate cut hopes, but Bitcoin roared to $52,000 a day later — hitting its highest price in two years.

The inflation-fueled selling on Tuesday represented Wall Street’s worst trading day in nearly a year, as major stock indexes like the S&P 500 skid 1.8% and retreated from all-time highs. Stocks rose alongside Bitcoin on Wednesday too, yet the S&P 500 failed to rebound as strongly as crypto’s largest coin.

The Bureau of Labor Statistics said that consumer prices rose 3.1% in the 12 months through January, above economists’ expectations of 2.9%. For investors, the uptick in inflation reinforced fears the Federal Reserve could hold interest rates higher for longer, instead of slashing them in coming months, as the central bank looks to soften inflation to 2% annually.

As Bitcoin shakes off Wall Street’s jitters, investors may get the impression that crypto and stocks are decoupling. But that trend could be reversing, according to data from Coin Metrics.

Since November of last year, Bitcoin's correlation had slowly withered from 0.4 to flip into a marginally negative correlation with stocks for the first time since 2020 — just as ETFs looked to be approved. Correlations are often calculated in a way where 1 represents a strong positive correlation and -1 suggests two things are moving in opposite directions.

“Regardless of what other risk assets do, we could have ourselves a narrative-driven rally in which demand [for Bitcoin] through these ETFs begets more demand and we kind of decouple from the rest of the market,” Fundstrat’s Head of Digital Asset Strategy Sean Farrell said. “That’s something we’re paying attention to.” 

Striving to snuff out inflation which topped out at 9.1% in 2022, the U.S. central bank has ratcheted interest rates to a 22-year high. By raising interest rates, the central bank makes it more expensive for consumers and businesses to borrow, thus cooling inflation. Yet if the Fed tightens too aggressively, it runs the risk of tipping the U.S. economy into a recession.

Following Tuesday’s inflation reading, traders are growing increasingly doubtful about rate cuts in May. Traders penciled in a 60% chance the Fed will hold rates steady that month on Wednesday, up from 40% on Monday, according to the CME Group’s FedWatch Tool. Analysts, including ​​Fundstrat’s Farrell, have highlighted rate cuts as a key factor in Bitcoin’s anticipated climb to $125,000 by the end of the year.

However, with the Fed’s path forward cloudier in the wake of Tuesday’s hotter CPI print, analysts such as FalconX’s Head of Research David Lawant believe Bitcoin’s correlation to the S&P 500 could push higher. It could be too early to tell, as spot Bitcoin ETFs continue to attract inflows, with no signs of slowing down

“There can still be room for [Bitcoin’s correlation] to go higher from here over the upcoming couple of months,” he said on X, adding investors’ reactions to the report is “evidence of macro becoming a more important driver for crypto.”

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