The recent market environment has been challenging for digital assets. Bitcoin has fallen below the significant $20,000 threshold, and contrary to many expectations, Ethereum's Merge did not trigger a sustained bullish rally. A prevailing view is that U.S. equity markets exert considerable influence on Bitcoin's price movements. This analysis explores the correlation between these markets, the impact of Federal Reserve policy, and potential future directions for both traditional and crypto assets.
Understanding the Correlation Between U.S. Stocks and Bitcoin
Many analysts highlight a strong correlation between the trajectories of U.S. stocks and Bitcoin. To examine this, we can compare the Nasdaq 100 Index, the S&P 500, and Bitcoin from the start of the current bear market. This macro-level comparison reveals insightful patterns for investors.
Chart analysis shows significant synchronization in the broad trend movements of U.S. stocks and Bitcoin. Both asset classes generally progressed through similar market phases. However, key differences emerge upon closer inspection. Bitcoin experienced more pronounced declines during downturns, reflecting a more pessimistic market outlook, particularly evident in the third phase of the current cycle. Conversely, U.S. equities demonstrated stronger rebound potential, with a notably superior recovery performance in the fourth phase compared to Bitcoin's rally.
In essence, while a strong linkage exists, the crypto market has seen greater capital outflows. Bitcoin has exhibited stronger downward pressure, highlighting its characteristic higher volatility and fragility. This suggests that Bitcoin's market bottom may occur later than that of U.S. stocks, and the required adjustment period could be correspondingly longer. For those looking to track these macro trends more closely, you can explore real-time market analysis tools.
Short-Term Bitcoin Performance Following Fed Rate Hikes
Given the established correlation, factors heavily influencing U.S. equities undoubtedly affect the crypto market. Certain statistical patterns have been observed, though recent Fed actions have challenged some of these historical norms.
Research from the Federal Reserve Bank of New York, analyzing data from 1994 to 2011, found that the S&P 500 typically rose in the 24 hours before a Federal Open Market Committee (FOMC) announcement. The index often saw significant gains the morning of the decision before leveling off in the subsequent hours and the following day.
Data from Dow Jones Market Data showed that following the first four 2022 rate hikes on March 16, May 4, June 15, and July 27, the S&P 500 gained 2.2%, 3%, 1.5%, and 2.6%, respectively. Bitcoin's performance mirrored this, posting gains of approximately 4.64%, 5.19%, 2.0%, and 8% around those same events.
However, the pattern known as the "Fed Drift"—where stocks tend to rally into FOMC meetings and hold gains the day after—failed to materialize following the September meeting. Markets tumbled after the Fed's hawkish commentary doused previous optimism. The key reason for this shift appears to be a fundamental change in market expectations. The Fed's persistent commitment to combating near-40-year high inflation, including a third consecutive 0.75 percentage point hike, significantly dampened investor sentiment.
Future Fed Policy and the Path for Crypto Recovery
Looking beyond short-term reactions, the future direction of Federal Reserve policy is crucial for understanding the medium-term trend for crypto markets.
The Fed is scheduled for upcoming policy meetings on November 1-2 and December 13-14. The latter will include an update of the dot plot and economic projections. The critical question for investors is whether the tightening cycle will continue and what the magnitude of future hikes will be.
An analysis team at Goldman Sachs, led by Jan Hatzius, projects the Fed will implement two more 50-basis-point hikes in November and December. They forecast one additional hike in 2023, pushing the federal funds rate into a 4.25% to 4.50% range, where it is expected to remain until 2024, potentially followed by a rate cut that year. Analysts cite several reasons for this outlook, including the resilience of the labor market reducing immediate concerns over overtightening and a desire among Fed officials to make faster, more consistent progress against inflation.
The implications of continued Fed tightening for risk assets are significant. RBC Capital Markets analyst Lori Calvasina notes, "Looking ahead to the end of 2022, we still expect volatility in U.S. stocks. We believe the market will be caught between extremely bearish sentiment and the longer-term impact of further Fed tightening."
Goldman Sachs' chief global equity strategist, Peter Oppenheimer, suggests U.S. equities could fall further as rates continue to rise into next year. Cyclical bear markets typically see drawdowns of around 30%, implying more potential downside. With the S&P 500 already down roughly 19% this year, an economic recession could trigger an additional decline of approximately 10%. He indicates that typical market bottoming signals have not yet appeared and are unlikely to materialize before year-end based on current inflation and peak rate assumptions.
From a macro perspective, financial conditions are still tightening. The crypto market is expected to remain volatile through year-end, influenced by pervasive bearish sentiment. If U.S. equities face a further 10% downside, historical correlation studies suggest crypto could experience even steeper declines.
Analyzing previous Bitcoin bear markets, peak-to-trough drawdowns have often reached 70-80%. Following the correlation with equities, a major reversal for BTC this year appears unlikely. The market may see an additional approximate 20% decline into next year, tracking equities. If the Fed begins cutting rates in 2024, as some predict, this macroeconomic shift, coupled with Bitcoin's next halving event, could create a potent catalyst for the next bull market cycle. To discover advanced trading strategies for navigating this volatility, many traders turn to established platforms.
Frequently Asked Questions
How strong is the correlation between Bitcoin and the U.S. stock market?
There is a significant positive correlation, especially with tech-heavy indices like the Nasdaq. During risk-off periods, both asset classes tend to move downward together as investors flee riskier assets. However, Bitcoin often exhibits higher volatility, meaning its downturns can be deeper and its rallies sharper.
Why didn't the Ethereum Merge trigger a bull market?
The Merge was a monumental technical success for Ethereum, transitioning it to Proof-of-Stake. However, it was primarily a supply-side change. The broader crypto market remains dominated by macro-economic factors, primarily aggressive Federal Reserve interest rate hikes, which have drained liquidity from risk assets globally, overwhelming any positive catalyst from the Merge.
When might the crypto market recover?
Most analysts believe a sustained recovery is tied to a shift in macroeconomic policy. A pivot from the Federal Reserve from tightening to a neutral or even accommodative stance is seen as a key prerequisite. Based on current projections, this could potentially begin in 2024, which would align with the next Bitcoin halving event.
How much further could Bitcoin potentially fall?
Historical bear market drawdowns for Bitcoin have been between 70% and 80% from all-time highs. If the current cycle follows this pattern and if U.S. equities see further declines, Bitcoin could experience additional downward pressure. Estimates suggest a further 20% decline is possible if macro conditions worsen.
What is the "Fed Drift" and why did it stop?
The "Fed Drift" was an observed tendency for stocks to rise in the days leading up to an FOMC meeting and hold gains afterward. This pattern broke in 2022 due to the Fed's unexpectedly aggressive and persistent hawkish stance on fighting inflation, which consistently shattered market hopes for a near-term policy pivot.
Should investors be buying during this downturn?
This depends on an individual's investment strategy, risk tolerance, and time horizon. Downturns can present opportunities for long-term investors to accumulate assets at lower prices, a strategy often called "dollar-cost averaging." However, given the potential for further volatility, any investment should be sized appropriately and viewed as a long-term hold.