While Dogecoin (DOGE) is riding Elon Musk’s coattails, Bitcoin (BTC) is suffering from its persistently high correlation with US stocks
Bitcoin (BTC), the undeniable leader of the entire crypto space, continues to move in tandem with US stocks in a worrying manifestation of an ongoing high correlation between the two seemingly unrelated assets.
It is widely believed that the ever-expanding altcoin space is generally following Bitcoin’s price cues. However, Dogecoin (DOGE) recently emerged as a rare outlier of this narrative, posting outsized gains on the back of Elon Musk’s chess-like moves.
Year-to-date, Bitcoin is down about 5 percent, while Dogecoin is down over 7 percent. However, over the past month, Bitcoin has posted gains of around 17 percent, while Dogecoin is up over 33 percent. Of course, a sizable chunk of Dogecoin’s 1-month gains resulted when Elon Musk, the CEO of Tesla and a staunch supporter of DOGE, announced a 9.2 percent passive stake in Twitter, sparking a violent rally in the stock on Monday . Musk’s involvement in Twitter is expected to result in more favorable policy changes at the social media company, thereby improving its overall profitability prospects.
But how does this move affect Dogecoin? Well, Musk has taken the lead in expanding Dogecoin’s use cases, allowing Tesla fans to purchase customized goods using DOGE as a viable payment method. It can also be used as an accepted form of payment in Tesla’s growing network of superchargers. Dogecoin bulls believe Tesla CEO can get Twitter to accept DOGE as a form of compensation for the platform’s large community of content creators. This, in turn, should expand the user base of a cryptocurrency otherwise notable for its general unusability.
Should this scenario materialize, a meme coin could consistently outperform Bitcoin, which remains vulnerable to prevailing sentiment in US stocks.
Bitcoin’s persistently high correlation with US stocks is its Achilles’ heel
Source: https://charts.coinmetrics.io/correlations/
As can be seen from the snippet above, Bitcoin currently has a correlation of around 51 percent with the benchmark S&P 500 index. This means that more than half of the movements in Bitcoin are explained by the corresponding movement in the S&P 500 index.
This is a worrying development and a significant impediment to a sustained surge in bitcoin price. US stocks recovered after the last FOMC meeting in March as the Fed’s dovish stance appeared to be fully priced in while the Russia-Ukraine war was perceived as on the verge of de-escalation. Perversely, this rally played an important role in easing broader financial conditions (FCI) and proved anathema to the Fed’s stated goal of tightening the FCI to contain demand in the US economy and tame inflation. As a result, the Fed is now becoming increasingly hawkish, as indicated by comments from FOMC member Lael Brainard yesterday, in which she seemed poised to up the scale of the Fed’s balance sheet normalization efforts. This predictably hit US stocks yesterday.
In addition, with the war between Russia and Ukraine showing no sign of abating, US stocks are likely to come under regular pressure in the coming weeks. Given Bitcoin’s high correlation with stocks, we don’t see a sustained recovery in the world’s leading cryptocurrency, at least until the prevailing correlation regime holds or stocks somehow brush aside the Fed’s efforts to tighten the FCI.
In this paradigm, we wouldn’t be surprised if Dogecoin continued to outperform Bitcoin, shaken by Elon Musk’s perceived goodwill towards the meme coin.
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