Author: Lisa, LD Capital
Recently, there has been a divergence between BTC and the Nasdaq, with the Nasdaq continuously hitting new highs while BTC declined, leading to a significant drop in the overall crypto market. This contrasts with the traditional expectation of a positive correlation between the Nasdaq and BTC. What is the underlying logic behind this, and has a similar situation occurred in history? This article explores the strength, variation, and changes in correlation between these two during different timeframes by reviewing the current and previous bull markets.
In fact, BTC and the US stock market do not exhibit a fixed positive correlation coefficient but rather vary in correlation strength across different phases of the cycle. Reviewing the last bull market and the current one reveals several patterns:
1. The initial starting point and the final endpoint of the upward trends in both BTC and the Nasdaq are perfectly synchronized in the time dimension.
(Last bull market start: March 2020 & peak: November 2021, Current bull market start: January 2023)
2. The processes of their upward movements differ:
The Nasdaq exhibits a relatively steady rate of increase, appearing as a straight line with a nearly constant slope on the candlestick chart.
BTC, on the other hand, shows exponential growth resembling an index, with a slow initial rise and a rapid surge at a certain point. Interestingly, these inflection points of accelerated growth correspond to the first stabilization pullbacks in the Nasdaq’s upward phases.
(October 2020 & October 2023)
3. Additionally, the first peaks of BTC coincide with the second minor consolidation phase in the Nasdaq’s upward trends.
(April 2021 & March 2024)
Which historical phase does the current market position correspond to, and is there a precedent for the situation of US stocks rising while BTC falls? It is evident that during most of the two bull markets, BTC and US stocks maintained a positive correlation, with phases of negative correlation appearing but not dominating. In the last bull market, after BTC’s first peak, the Nasdaq continued to rise while BTC corrected, resulting in a divergence in their trends (highlighted in the yellow boxed area in the figure below), similar to the current market situation, where history seems to repeat itself.
As for the future market direction, how long will the divergence between BTC and the Nasdaq continue, and how might this divergence resolve? From both a timing and intensity perspective:
1. In the last bull market, periods of divergence between the two lasted briefly, approximately 9 weeks on a weekly basis, before returning to a positive correlation (on a weekly timeframe).
(Figures attached)
2. The point at which they resumed positive correlation in the last bull market was when BTC showed clear signs of weakening downtrend momentum on a daily timeframe and reached significant support levels.
(Figures attached)
Measured against historical standards, the current market does not yet fully meet the conditions for divergence recovery, necessitating more candlestick information. How can we logically understand this unique common trend observed in both bull markets? Whether it is BTC, gold, or US stocks, they operate within similar macroeconomic environments, constrained by factors such as financial liquidity and risk-free asset returns. BTC, being a more resilient asset class, can surge strongly early in a bull market, significantly outperforming US stocks, but such strength is not perpetual. After the primary uptrend, it may weaken relative to US stocks, akin to the relationship between altcoins and BTC. Alternatively, during the primary uptrend phase, market liquidity supports overall asset price increases. However, as the upward momentum reaches a certain threshold, the fuel or drive for further rises may diminish, making it difficult to sustain a collective rise in all asset classes. Recent market movements have been influenced by sell-offs from the German government and Mount Huang.
In conclusion, regardless of how this trend is interpreted, BTC is expected to restore positive correlation with US stocks after sufficient adjustment. (The above represents the author’s personal views and is for reference only.)
