Much to the chagrin of crypto investors, Bitcoin, and other leading cryptocurrencies have largely been following the lead of the stocks and the Nasdaq in particular. Is a crypto decoupling finally here?
During most of the past year, crypto has moved up or down in lockstep with stocks. This was largely unexpected, given that Bitcoin offers an alternative form of money that should act more like a hedge, similar to gold, and less like a risk-on asset. Many crypto voices have extolled the benefits of Bitcoin being non-correlated to other asset classes, helping investors diversify their portfolios. But this has not been the case over the past year and all eyes are now watching to see if crypto is finally decoupling from stocks.
To most investors, cryptocurrencies are still largely viewed as a technology. Yet in 2023, we might be seeing early signs that the correlation between crypto and equities could be breaking down. At Nicoya Research, we think that crypto valuations can continue higher in 2023 and into 2024, regardless of whether the Federal Reserve is able to engineer a soft landing for stocks.
Is Crypto Decoupling from Stocks?
The chart below shows Bitcoin and the Nasdaq tracking very tightly throughout the back half of 2022. Then the FTX collapse and bankruptcy in November caused a big gap to emerge between Bitcoin and stocks as the entire crypto sector cratered sharply and stocks were not impacted. Then the lines converge again as stocks and crypto both rebounded at the start of 2023.
But if we zoom into the past week, we see that while the Nasdaq index traded sideways and then declined, the Bitcoin price has climbed to new 2023 highs. Bitcoin has not needed an advancing tech sector to rack up gains in recent days. We would like to see more of this trading action to demonstrate that Bitcoin can trade independently of equities.
While a few days does not yet make a trend, this is an encouraging development nonetheless. We will be tracking it closely to see if this decoupling can continue. As we can see below, this trend change was picked up by the financial media over the past few days. This includes coverage of not only the short-term divergence between stocks and crypto, but also the fact that crypto has soared in the face of regulatory crackdowns.
It is worth noting that the leverage Bitcoin has offered to stocks works in both directions. During the correction of 2022, the Bitcoin price dropped 2x as much as stocks. While the Nasdaq fell 33% on the year, Bitcoin was down 65%. Even when factoring out the FTX collapse, we still see roughly a 2x decline for Bitcoin versus the Nasdaq from the peak in November 0f 2021 to early November 2022. During the rally of 2023, the Nasdaq is up 14% while Bitcoin is up 45% for leverage of just over 3x to the upside.
Part of the recent crypto rally can be attributed to regulatory moves not being nearly as harsh as some had feared. We also learned today that in the Mt Gox ongoing bankruptcy proceedings, the biggest creditor has chosen to receive an early payout in Bitcoin instead of fiat currency. This suggests that the creditor is bullish on Bitcoin and would like to continue holding it rather than selling it for fiat. The move helps alleviate concerns of major selling pressure stemming from Mt Gox creditors regaining access to their funds.
Another bullish trend to watch over the next year is the approaching Bitcoin halving, which is estimated to take place during March 0f 2024. This will once again cut the issuance of new Bitcoin in half, falling from 6.25 BTC to 3.125 BTC per block. The price of Bitcoin typically rallies moderately in the year ahead of the halving and then rallies very strongly in the year after the halving. We are currently in the re-accumulation phase prior to the bull market phase which should start in early 2024. The smart money has been buying the dip while bandwagon speculators have been panic selling and leveraged shorts have been squeezed out of their positions.
Let’s hope we see more divergence between crypto and stocks moving forward. A crypto decoupling is good for the sector.
Nicoya Research was one of the first newsletters to recommend cryptocurrencies to subscribers back when Bitcoin was around $100 and Ethereum was around $10. We have a history of outperforming the market that continues in 2023, with our altcoin picks up 2x to 5x the gains of Bitcoin year to date. While BTC and ETH remain our largest holdings, we are bullish on coins that are innovating in areas such as artificial intelligence (AI), gaming, cross-chain interoperability, and decentralized finance.
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