Bitcoin craters 7% amid broader stock market sell-off, reinforcing its high correlation to risk assets

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  • Bitcoin plunged 7% on Thursday after the broader stock market began to trend lower and erase Wednesday’s gains.
  • Bitcoin initially rallied on Wednesday, following the stock market as the cryptocurrency becomes highly correlated to risk assets.
  • Fairlead Strategies’ Katie Stockton believes bitcoin is likely to fall nearly 30% to $27,200.

Bitcoin plunged as much as 7% on Thursday, following the broader stock market lower as investors continue to digest the Fed’s decision to raise interest rates by 50 basis points.

Bitcoin fell below $37,000 in Thursday trades to $36,967, yet another rejection at its all-important resistance level of $40,000. The cryptocurrency initially rallied after the Fed’s FOMC meeting on Wednesday, rising more than 3% to a high of $40,050, but it soon followed the stock market lower.

Bitcoin is more and more behaving like a risk asset, similar to stocks, as its correlation to the tech-heavy Nasdaq 100 increases. Year-to-date, bitcoin is down 20% while the Nasdaq 100 is down about 21%. Both asset classes have seen short-term peaks on the same day, as well as short-term bottoms, according to data from Koyfin.

The back and forth between up and down days in bitcoin and the stock market partially deflates the argument that bitcoin is a hedge against inflation. Because as inflation continues to surge to 40-year highs, bitcoin shows no signs of providing protection against the rise in everyday prices given its ongoing decline.

And technical analyst Katie Stockton of Fairlead Strategies believes the decline in bitcoin could get worse after it was decisively rejected at its $40,000 resistance level. In a note on Monday, Stockton said there is now increased risk for bitcoin to fall to $27,200, representing potential downside of 26% from current levels.

“Because the monthly [moving average convergence/divergence indicator] is on a ‘sell’ signal, and the monthly stochastics are pointing lower above oversold levels, there is room for further downside in the months ahead,” Stockton explained.

As investors seek to hedge their investments against rising inflation, bitcoin may no longer be the answer some were hoping for as the direction of the crypto’s price more and more follows the direction of stock prices.

Koyfin