The Dow Jones plummeted 2.84% on June 26, posting a 9.27% drop from the month’s peak. As risky assets face fear of a correction, the vulnerability of a short-term Bitcoin (BTC) price pullback may increase.
While many fundamental factors are causing a downtrend in the stock market, analysts point to declining liquidity as the main catalyst. When the Federal Reserve balance sheet began to contract, US stocks fell in tandem.
The correlation between Bitcoin and US stocks in recent months increases the probability of a BTC price drop.
All markets move cautiously, and Bitcoin is no exception.
Holger Zschaepitz, market analyst at Welt, explained that investors were initially forced by the aggressive injection of liquidity from the Federal Reserve. But, as liquidity slowed, various macro risks, such as the number of virus infections, began to affect investor sentiment.
Correlation between the US stock market and global liquidity. Source: Holger Zschaepitz, Bloomberg
Referring to a graph showing the correlation between the S&P 500 and global liquidity, Zschaepitz wrote:
“This graph shows that equity investors are addicted to new stimuli like a drug addict. Without new Central Bank liquidity, a challenging global economy, high stock market valuations and rising greedy cases are important again. “
Similarly, the price of Bitcoin fell sharply when the US stock market initially fell back. The Dow Jones saw its first major drop of the week on June 23. Bitcoin also experienced a sharp rejection at $ 9,700 the same day, posting a 7% drop in 24 hours.
Bitcoin falls 7% in a 24-hour span on June 23, as stocks fall. Source: TradingView.com
For most of the past two years, the price of Bitcoin showed little or no correlation to stocks, moving based on its own market dynamics. But the surprising correlation between Bitcoin and stocks, especially in the second quarter of 2020, shows that investors remain highly uncertain.
Starting with a double-digit unemployment rate and the fight to reduce the rate of new virus infections, many factors are preventing a smooth global economic recovery.
Is short-term correlation necessarily a bad thing?
PlanB, the pseudonymous creator of the stock-to-flow model, said the short-term correlation between Bitcoin and stocks could be positive.
The simultaneous increase between Bitcoin, stocks and other risky assets could indicate that the mainstream regards BTC as an established asset.
“I see it as good news. I would be really concerned if all of these trillions of QE money would flow into stocks, bonds, real estate, gold … but not bitcoin. Also, the Fed is driving stocks, so knowing that stocks and bitcoin are holding together means that BTC is aligned with the interests of the Fed. “
If the Fed raises liquidity again as a result of worsening sentiment in the U.S. economy, it may also benefit Bitcoin’s price trend.
However, in the immediate term, BTC charts suggest that a deeper drop is still possible. Technical analysts foresee a possible pullback to $ 7,000, roughly a 20% drop, considering that the $ 9,000 support level has been exhausted.
Yesterday, Cointelegraph Markets reported that popular market analyst Tone Vays believes that the $ 6K- $ 10K range will remain in effect at least until the end of this year.