There is no denying that bitcoin’s price is heavily affected by its macro-environment. Stock market correlation reached a record high in early 2018, and it is still difficult for the cryptocurrency market to get away from this. Bitcoin investors will do well to respond to this and to pay close attention to the stock markets for possible predictions of where bitcoin prices may go.
We have Institutional Investors
Over the past few years, the call for institutional adoption was loud and clear. These big players were actually beginning to enter the market. While this had come with a lot of positives for bitcoin, such as increased demand, it had also inadvertently tied bitcoin’s price to the stock market, which these big players are very visible.
This resulted in a greater correlation between bitcoin and the changes taking place in the stock markets. It means that any financial situation that had a negative impact on institutional investors in stock markets has also flowed into bitcoin. Bitcoin is more inclined to fall if the stock markets are falling. And what’s more is that bitcoin actually does this with more volatility, causing a larger swing in price compared to the stocks.
High correlation with the stock market| Source: Arcane Research
As a result, if institutional investors have to sell stocks as recently observed, the money flows into bitcoin. Also, when the stock market is being forced to sell, it is often forced to buy crypto. Therefore, a decrease in stock market prices means a drop in bitcoin price.
Bitcoin is being affected by rising interest rates
The financial market has been in a serious bind since 2022, when inflation was at its highest level. This has caused a sharp rise in interest rates, and the Fed has needed to find new methods to counter it.
Source: BTCUSD on TradingView.com| Source: BTCUSD on TradingView.com
These rising interest rates have been one of the major reasons behind bitcoin’s decline. Recall that the decline in the crypto market had actually started when some big players in the space had failed, but it was further pushed forward when the Fed announced the March interest rate hike that moved the fund’s rate from 0% to 2.25%-2.5%.
To predict bitcoin’s future, it is crucial to monitor the macro environment. An investor can make informed decisions by staying up to date with movements in the stock and Fed interest rates. This is because of its current correlation to the stock markets.
Featured image taken from GOBankingRates and charts from Arcane Reseach.
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