Despite macro-peril, bitcoin surges 50% over stocks

There are a number of factors that suggest Bitcoin and other tokens should be retreating in haste, including concerns over further interest rate hikes, a fizzling stock rally, and a US crypto crackdown. In fact, they are actually extending their rebound from 2023 to 2024.

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After a further surge in February, Bitcoin's year-to-date gain has now reached 50%, contrasting with a retreat in global equities this month due to a macroeconomic environment dominated by concerns about growth and inflation.

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As a result of this divergence, the positive correlation between share prices and cryptocurrency prices that sprouted during the pandemic has been dented. There is a 40-day correlation between Bitcoin and the S&P 500, which has dropped to its lowest level since 2021 from a record high of over 0.8 set in May. Having a reading of 1 indicates assets are fluctuating in lockstep, while a reading of minus 1 indicates the opposite is true.

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The relationship between Bitcoin and the dollar gauge has also shifted: a once strongly negative 40-day correlation has dissolved, as has the tight connection between Treasuries and Bitcoin in January.

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“Digital assets have decoupled from traditional assets in 2023” and “crypto-specific events are increasingly driving the market,” Kaiko noted.

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While a range of assets including digital tokens surged in January, the risk rally outside of crypto snapped this month when data including strong US jobs figures dashed hopes of an imminent peak in borrowing costs.

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The growth of crypto assets is outpacing the growth of traditional assets as a result. A smidgen over 6% has returned to the S&P 500 this year, almost 13% for the Nasdaq 100, and only 1% for gold. There has been a 40% rise in the MVIS CryptoCompare Digital Assets 100 Index, a ranking of the world's most popular tokens.

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Commentators argue that endogenous drivers in the digital asset space are causing speculative bets on tokens to be influenced by endogenous drivers. For instance, Hong Kong, which has converted to a pro-crypto stance in October, announced on Monday that it will permit retail investors to trade larger coins as part of a plan to allow consumers to participate in the debate.

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During his time at B2C2, Adam Farthing, an analyst for crypto market maker B2C2, noted that 59% of flows from Asia-Pacific were buyers, compared to 55% in Europe and the Middle East. Regulators in the U.S. have turned the heat on the crypto industry in the wake of the collapse of the FTX exchange, increasing the pressure on the sector.

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The next generation of the Ethereum blockchain - one of the biggest commercial highways in the virtual-asset industry - is another crypto theme that needs to be discussed. According to the so-called Shanghai upgrade, investors will be able to withdraw Ether coins they had locked up to help the network run in exchange for rewards, a process called staking, which is an important component of the Shanghai upgrade.

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There has been a surge in the popularity of smaller tokens coming from applications that try to make staking rewards easier for users. The data from CoinGecko shows that Lido DAO and Rocket Pool's RPL are up 200% and 150%, respectively, in 2023, based on data from CoinGecko.

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“There will be a decoupling of crypto from traditional markets through innovation,” according to David Moreno Darocas, head of research at market intelligence firm CryptoCompare.

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Crypto mining rewards are halved periodically, reducing the supply of new tokens by 50% - an event known as halving. A halving of the Litecoin token is due in the coming months, and it has gained about 35% so far this year. In 2024, Bitcoin's halving is expected.

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‘Sector-Specific’ Factors

“In the absence of a material escalation in macro instability, we expect crypto prices to return to being driven by sector-specific factors,” stated Richard Galvin, co-founder of fund manager Digital Asset Capital Management.

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Crypto correlations can change on a dime and some have argued that Bitcoin has surfed a short squeeze and is vulnerable to rising interest rates in the future. In the past year, the market value of digital tokens has been slashed by $1.5 trillion due to rising borrowing costs and a series of blowups.

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While there is still a lot of skepticism among investors, those who are interested in cryptocurrencies are coming off the sidelines and appear to be buying "for price appreciation and diversification," according to Alkesh Shah, Bank of America Corp.'s head of crypto research.

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Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co., said retail-investor demand helps.

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“Retail impulse is more dominant year-to-date in crypto due to the absence of institutional investors currently” post-FTX, he said.

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As of 9:42 a.m. on Tuesday in London, the value of bitcoin was little changed at about $24,825 as it stood. Ether and Dogecoin, which are smaller tokens, also experienced relatively small movements.

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