The Dow Jones plummeted by 2.84% on June 26, recording a 9.27% fall since the month’s peak. As risk-on assets face the fear of a correction, the vulnerability of a near-term Bitcoin (BTC) price pullback may increase.
While many fundamental factors are causing a stock market downtrend, analysts are pointing at the decline in liquidity as the primary catalyst. As the Federal Reserve’s balance sheet started to contract, U.S. stocks fell in tandem.
The correlation between Bitcoin and U.S. equities in recent months raises the probability of a BTC price drop.
All markets are moving cautiously and Bitcoin is no exception
Holger Zschaepitz, a market analyst at Welt, explained that investors were initially compelled by the Fed’s aggressive injection of liquidity. But, as liquidity slowed down, various macro risks such as the number of virus infections began to affect investors’ sentiment.
Correlation between the U.S. stock market and global liquidity. Source: Holger Zschaepitz, Bloomberg
Referring to a chart displaying the correlation between the S&P 500 and global liquidity, Zschaepitz wrote:
“This chart shows that equity investors are addicted to fresh stimulus like a junkie. Without fresh Central Bank liquidity, a challenging global economy, high stock market valuations & increasing covid cases matter again.”
Similarly, the price of Bitcoin fell steeply when the U.S. stock market initially pulled back. The Dow Jones saw its first big fall in the week on June 23. Bitcoin also saw a strong rejection at $9,700 on the same day, recording a 7% drop in 24 hours.
Bitcoin falls by 7% in a 24-hour span on June 23, as stocks drop. Source: TradingView.com
For the majority of the past two years, the price of Bitcoin showed little to no correlation with stocks, moving based on its own market dynamic. But the striking correlation between Bitcoin and stocks, especially in the second quarter of 2020, shows that investors remain highly uncertain.
From a double-digit unemployment rate and the struggle to reduce the rate in new virus infections, many factors are preventing a smooth global economic recovery.
Is short-term correlation necessarily a bad thing?
PlanB, the pseudonymous creator of the stock-to-flow model, said that the short-term correlation between Bitcoin and stocks could be positive.
The simultaneous upsurge among Bitcoin, stocks and other risk-on assets could indicate the mainstream considers BTC as an established asset.
“I see it as good news. I would be really worried if all these trillions QE money would flow to stocks, bonds, real estate, gold … but not to bitcoin. Also, FED is pumping stocks, so knowing stocks and bitcoin stay together means BTC is aligned with FED interests.”
If the Fed raises liquidity once again as a result of deteriorating sentiment around the U.S. economy, it may also benefit the price trend of Bitcoin.
In the immediate term, however, BTC charts suggest that a deeper drop is still possible. Technical analysts foresee a potential pullback to the $7,000s, roughly a 20% drop, considering that the $9,000 support level has been worn out.
Yesterday, Cointelegraph Markets reported that popular market analyst Tone Vays believes the $6K-$10K range will remain in place at least until the end of this year.