Rising Correlation Between Cryptocurrencies and the S&P 500

The positive correlation between cryptocurrencies and the S&P 500 has risen to levels not seen since mid-2022, according to Bloomberg data. This close relationship in price movements indicates that macroeconomic factors influencing U.S. stocks are significantly impacting the cryptocurrency sector as well.

The Bloomberg report indicated that the 40-day correlation coefficient between a gauge of the largest 100 cryptocurrencies and the S&P 500 now stands at about 0.67. This level was only surpassed in the second quarter of 2022 when it reached 0.72. During that time, bitcoin dropped to approximately $19,000, coinciding with the S&P 500’s fall to 3,674.84 points. The equity index has since increased 35%, reaching a current record high of 5702.55 points, while Bitcoin has appreciated 69% to around $63,500.

The data from Bloomberg aligns with a recent report from Coinbase analysts David Han and David Duong, who noted bitcoin’s correlation with the S&P 500 at a slightly higher value of 0.69. A correlation coefficient of 1 indicates a perfect positive correlation, while -1 signifies a perfect negative correlation, and 0 denotes no correlation.

Persistence of Positive Correlation

FalconX Head of Research David Lawant stated that the positive correlation between equities and cryptocurrencies is expected to persist, especially as indicators suggest the U.S. economy may be heading towards a soft landing. This occurs when monetary policy effectively curbs inflation while sustaining economic growth and avoiding a recession. “Correlations between crypto prices and broad risk asset indices have been on the rise and are likely to remain elevated for a while,” Lawant said in an email sent to The Block. He added that a lower interest rate cycle combined with a soft landing is the base-case scenario for most investors, creating a novel macro environment for crypto.

“The combination of a favorable election outcome and a more favorable liquidity environment for risk assets could start the next crypto bull market,” Lawant added.

Risk Assets Post Upward Trend Following Recent Fed Rate Cut

Galaxy’s Head of Liquid Active Strategies and Portfolio Manager Chris Rhine highlighted the consolidation in both risk assets and cryptocurrencies, positioning both markets favorably for an upward trend. He noted that positive catalysts are outnumbering negative ones, particularly as risk assets reacted positively to the Federal Reserve’s recent 50 basis-point rate reduction, with digital asset prices also rising as anticipated due to the easing monetary policy.

Additionally, he mentioned that the narrative surrounding the upcoming U.S. presidential election has shifted toward becoming a more positive catalyst, especially after presidential candidate Kamala Harris pledged at a fundraiser to support the growth of the crypto sector. This development is complemented by Anthony Scaramucci and other crypto advocates collaborating on her campaign’s crypto policies.

“Optimism is building that Vice President Kamala Harris’ stance on crypto will be more favorable than the Biden administration’s policies, offering a more optimistic regulatory and legislative roadmap for the industry. It is very likely that more large wealth management platforms will approve Bitcoin ETFs in early Q4, further expanding access to digital assets across the trillions of dollars of wealth managed by brokerage firms,” Rhine said.