After a bout of gnawing volatility and existential anxiety in the currency world, investors in digital assets are again looking to the ups and downs of the U.S. stock market to determine whether the worst is over.
Stocks have mostly rallied over the past few weeks, as has bitcoin, which is up about 25% since the start of July. After weakening slightly in June, the 90-day correlation between bitcoin and the S&P 500 is now around 0.65 again, the highest level for such an index in the data going back to 2010. A coefficient of 1 indicates that assets move in the same direction, while a coefficient of -1 indicates that assets move in opposite directions.
Financial professionals say cryptocurrencies will do better "if the stock market has bottomed." "There is nothing more powerful in the market than the first half of the year, when stocks went down at a high speed, and cryptocurrencies were part of the retreat."
Bitcoin rose 4.2 per cent to $24,241 on Monday (Aug 8), its highest level since late July. Other cryptocurrencies also rose, with Ether up 5.6% at one point to $1,818.
This has been the case a lot this year, with stocks and cryptocurrencies following a similar path. And a hawkish Fed determined to curb four decades of high inflation has led to volatility across assets in 2022.
But whether stocks and cryptocurrencies have bottomed or not is a question that no one can really be sure of. The bottom can only be seen after the fact, and both are likely to rehit their lows later this year or even early next year.
Analysts at Crypto Research said Bitcoin activity was entirely in "a well-defined downtrend channel". On-chain activity, they added, "suggests that the inflow of new demand so far remains minimal." At the same time, however, trading demand has trended sideways or downward in recent weeks, suggesting that "a stable basis of high confidence among traders and investors remains in place". In addition, on-chain transaction fees are in bear market territory, and any upturn could signal recovery.
"The 2022 bear market has historically been negative for the digital asset space," the analysts wrote in a note. "However, after such a sustained period of risk aversion, the market is starting to focus on whether this is a bear market relief rally or the start of a sustained bullish impulse."
July was a great month for bitcoin, Ether and other cryptocurrencies. Bitcoin rose 27% for the month, its biggest gain since October, while the second-ranked ether gained 70%, its best monthly performance since January 2021. The total amount of Tether stablecoins used in bitcoin and Ether also rose during the month, according to transaction data, suggesting that investors see them as a safer place in the crypto world.
To be sure, while cryptocurrencies have rebounded in recent weeks, they are still well below their highs at the end of last year. Bitcoin has been hovering around $24,000, down from nearly $69,000 in November. Even some heady developments, including Coinbase's new partnership with BlackRock, couldn't jolt Bitcoin out of its torpor and into the stratosphere.
"Cryptocurrencies are more volatile and therefore more risky, and it makes sense that investors need to rebuild confidence after a decline." However, she added that cryptocurrency investors are taking cues from the stock market, but that the relationship goes both ways. "That seems reasonable because both are risky assets."