No More an Outlier: Bitcoin’s Dance with Macro Economic Patterns

• Cryptocurrencies are now intertwined with macroeconomic indicators, marking a significant shift from their previous isolated nature.
• About half of Bitcoin’s 80% price increase from December to mid-July is likely due to broader macro developments, with the rest attributed to unique Bitcoin-specific factors.

For long, Bitcoin and other cryptocurrencies functioned in their unique ecosystems, often considered as assets detached from traditional financial markets. However, the narrative has significantly altered over the past three years. Our extensive research shines a spotlight on this shift, unveiling how Bitcoin’s price variations now echo the broader market indicators’ rhythm.

A New Economic Symbiosis: Bitcoin and Macro Trends

Historically, Bitcoin’s correlation with the likes of the S&P 500 or other similar indices was tenuous at best. The COVID-19 pandemic, however, marked a turning point, igniting a change in this relationship. Since then, Bitcoin and the broader crypto market have begun a slow but definitive integration with mainstream financial indicators. Our research showcases that the correlation between Bitcoin and the S&P 500 has solidified over the past three years, peaking at a notable 65% in October 2022.

This marked correlation increase with the S&P 500, tech stocks, retail-favored shares, and various commodities is indicative of an emerging pattern. Bitcoin, and by extension, the wider cryptocurrency market, is no longer an independent entity. Instead, it’s now influenced substantially by broader macroeconomic developments.

Through an assortment of analytical methodologies, we deduce that nearly half of Bitcoin’s impressive 80% price surge from December to July mirrors the macroeconomic trends. The other half, meanwhile, is likely driven by factors unique to Bitcoin.

The ‘Beta’ Factor: Decoding Bitcoin’s Price Variations

To fathom how much of Bitcoin’s year-to-date gain can be credited to the widespread surge in risky assets, we calculated the ‘beta’. Beta, in this context, is a measure of Bitcoin’s price sensitivity to the shifts in various market indicators.

Following this, we found that Bitcoin’s year-to-date gain surpasses what can be explained by the appreciation in other markets and Bitcoin’s historical beta. Bitcoin’s 82% gain in the first half of the year contrasts sharply with the median predicted increase of 26%, based on our beta analysis.

However, it’s also essential to recognize unique factors that have likely spurred Bitcoin’s price growth. These include the positive sentiment surrounding potential approval of a spot Bitcoin ETF in the U.S market and the Bitcoin price surge following regional bank stress incidents in March.

As Bitcoin and other digital assets become more closely linked with macroeconomic trends, it’s prudent to consider incoming inflation data and the Federal Reserve’s response as potential influences on Bitcoin’s value. For instance, if inflation cools off, allowing the Fed to halt rate hikes, this year’s rally in Bitcoin and other risky assets may persist. Conversely, if inflation proves persistent, more Fed rate hikes could act as a potential headwind.