Correlation Sucks! US stocks dive and crypto dives right after them

After the Federal Reserve's rate hike announcement yesterday stocks and crypto saw a brief relief rally despite the largest interest rate increase in more than two decades.  Today, as the nation celebrates Cinco De Mayo, stocks tumbled with crypto following close being.

Stocks fell sharply losing 5% of value early in trading today and crypto charts virtually mirrored those movements.

The correlation is real!

Unfortunately for investors looking to diversify their investments with cryptocurrencies, the correlation in the price movement between stocks and crypto makes it a less appealing sector to get involved with.  More specifically, the synchronized movement between crypto and tech stocks lessen the appeal of digital currencies to many who have significant amount of capital to invest.  Throw in the fact that Bitcoin used to be seen as a hedge against inflation, a concept that helped draw  newcomers into the space, and now it appears BTC is no better inflation hedge than stocks further curtailing any uniqueness or reason for adding to one's diversified portfolio.

Bitcoin had fallen just over 22% so far in 2022 as of noon today, that nearly matches Nasdaq which is also down a little over 22% in the calendar year.  As Bitcoin (BTC)  goes, the rest of the crypto market tends to follow although Ethereum (ETH) is down around 27% this year and altcoins tend to show even more volatility than BTC.

There is so much uncertainty in the markets right now with high inflation leading to interest rate hikes, Covid outbreaks in Asia threatening supply chains and the war in Ukraine being among chief concerns currently.  

The seemingly algorithmic trading that dominates markets these days almost ensures that stocks and cryptocurrencies move in lock step when it comes to major macroeconomic news.

Interestingly, crypto markets run 24/7 so they have more time to lose or gain depending on momentum.  When the markets close on Friday, crypto keeps on going and that is when you can really get into trouble.  Add in the fact that Bitcoin and other digital assets are viewed as more volatile and risky options, the chance for even bigger losses than stocks is a reality during bearish markets.

The correlation between stocks and crypto is only strengthening over time.  This has been especially true since the start of the pandemic as adoption rates of crypto have increased dramatically.  

Will this correlation continue?  Possibly not.  A pending influx of institutional investors could help Bitcoin break free from the tight correlation to growth stocks as buying pressure combined with a limited supply should help drive up BTC prices.  In addition, Bitcoin tends to move in a four-year halving cycle which could start pushing the coin higher in early 2023.  Stocks do not have these factors impacting prices and hopefully a divergence can begin to emerge.

Those that follow a HODL philosophy could benefit from these trends that could boost prices in the next six to nine months.  Let's hope so because all this current correlation sucks!