The Correlation Between Bitcoin And The Stock Market In The Short Term

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It is well-known that the stock market benefits from a lower interest rate environment. Investors seek higher returns when basic savings rates don't outpace inflation. Likewise, as rates go up, this eventually takes a toll on the stock market. Small rate increases might have no impact, but a series of rate increases after a period of low rates typically brings the market back.

A separate question that comes up is, "How does the stock market movement correlate to Bitcoin (BITCOMP)?" The reality is that the cryptos are too new to really have a track record about this. In fact, for the most part, Bitcoin and all of the rest came into being during the period where interest rates were near zero. One could argue that part of the rise in Bitcoin was driven by these low rates and the fact that some speculators were looking for bigger returns than about half a percent.

Bitcoin topped out around $70,000 on November 10, 2021.  The S&P reached as high as 4818.62 on January 4, 2022, two months later. Both Bitcoin and the S&P reached their lowest points in mid-June and are each now about 8% back up from those lows, at least for now. It is very clear from this analysis that Bitcoin and the broad stock market generally move in sync, and once Bitcoin started to come back down from its highs, the stock market followed shortly and both took significant hits. On a percentage basis, Bitcoin took a bigger hit, but it was more in "bubble territory" than the broad market.

In September, when Bitcoin reached its highs, there were clear signs that due to supply-chain issues, inflation was on the rise and the bond market started to signal that the Fed would be raising rates. The stock market didn't start to head down initially. It was two months later, when it became clear that there was a significant inflation problem and that the rate hikes would be coming harder and faster than originally anticipated, that the stock market topped out.

What conclusions can we draw from this? While they both generally move in sync, Bitcoin is more sensitive to interest rates because it is more of a speculative asset class that people poured money into when they couldn't get a return elsewhere. During the market decline, stocks dropped the most on days where Bitcoin took big hits. It's clear that the "wealth creation" in Bitcoin helped fuel the stock market to some extent, but the stock market is also tied to fundamentals and earnings, while Bitcoin is not.

Since this was the first time we have been in a rising interest rate environment since 2008, we can only look at Bitcoin through this one example in time. Will Bitcoin always be this sensitive to interest rates? The correlation shouldn't be measured between the stock market and Bitcoin. The correlation should be searching to understand how rates impact cryptocurrencies just like we have a decent understanding of how interest rates impact the stock market. Both might be viewed as different levels of speculative investing, but interest rates are clearly the driving force in the behavior of both markets.