Cryptocurrencies and U.S. Stocks: Correlation Hits a Two-Year High Following Fed Decision
The correlation coefficient between cryptocurrencies and U.S. stocks has reached a two-year high, now standing at 0.67. This significant development comes on the heels of the Federal Reserve's (Fed) recent decision to lower interest rates. According to Bloomberg, such a correlation hasn't been observed since the second quarter of 2022, when it peaked at 0.72.
Correlation of Cryptocurrencies with the S&P 500 Index
As of this writing, the correlation coefficient for the top 100 cryptocurrencies by market capitalization with the S&P 500 index is approximately 0.67. This figure indicates that cryptocurrencies and stocks are moving in the same direction, albeit not entirely synchronously. If this value were to reach 1, it would signify a complete correlation between the assets, while a value of -1 would reflect an inverse relationship.
Reasons for the Increased Correlation
Analysts attribute the rise in the correlation coefficient to the Fed's decision to reduce interest rates by 50 basis points. According to Caroline Mauron, co-founder of Orbit Markets, "Macroeconomic factors are driving cryptocurrency prices today, and this trend is expected to continue throughout the Fed's monetary easing cycle, unless we see a cryptocurrency-specific 'black swan' event."
This statement highlights the growing influence of global economic factors on the cryptocurrency market. As macroeconomic conditions change, cryptocurrencies are increasingly responding to developments occurring in the traditional financial sector.
Impact of Lowering Interest Rates
The Fed's reduction in interest rates is often viewed as a signal for investors that the time for investment has become more favorable. Lower rates typically lead to increased liquidity in the market, which can, in turn, stimulate price growth for assets, including stocks and cryptocurrencies. This explains why there is currently an observed increase in the correlation coefficient between these two asset classes.
Recent Decline in the Crypto Market
Despite the positive changes in correlation, it is important to note that on August 4-5, 2024, the cryptocurrency market experienced a significant downturn. As a result, the stocks of major crypto companies fell by an average of 18.8%. This decline underscores that, despite the current correlation, the cryptocurrency market remains volatile and susceptible to sharp fluctuations.
Conclusion
As the correlation between cryptocurrencies and U.S. stocks reaches a new high, investors and analysts should closely monitor developments. The influence of macroeconomic factors on cryptocurrencies is becoming increasingly evident, and the future of these assets will depend on the Fed's ongoing decisions and the overall economic situation in the country.
Understanding this correlation can help investors make more informed decisions and better navigate the complex landscape of cryptocurrencies and traditional finance.
