- Bitcoin and stocks rallied at the last-minute Monday, paring losses, but analysts say rough waters may be ahead
- With bitcoin’s correlation to the stock market on the rise, investors should keep an eye on equities
As bitcoin continues to move more and more in sync with the stock market, January’s downturn could foreshadow an even larger sell-off, analysts say.
The S&P 500 and the Nasdaq notched their worst monthly declines since the start of the pandemic in March 2020,down 5.9% and 10.1%, respectively. Bitcoin and ethereum posted January losses as well, both down about 19% and 26%, respectively, at market close Monday.
January’s losses would have been even worse if it hadn’t been for Monday’s eleventh-hour rally. Major stock indexes and cryptocurrencies traded higher, with the tech-heavy Nasdaq gaining almost 3.5%.
“Retail investors do not buy every dip — Google Trends analysis shows they aren’t even aware of every dip,” said Nicholas Colas, co-founder of DataTrek Research. “It takes a big selloff after earlier declines to spark interest. That’s what happened a week ago, which was the first time we saw market-related search interest increase this year.”
As bitcoin continues to tighten its correlation with the stock market, lower equities could mean bad news for the cryptocurrency.
“Bitcoin is rallying as risky assets finish a very bad January on a positive note,” Edward Moya, senior market analyst at Oanda, wrote in a recent note. “Bitcoin bullish momentum is slowly building up and it could surprise to the upside if the dollar continues to weaken as much of the Federal Reserve tightening for the year begins to get priced in.”
The most likely scenario for bitcoin, Moya said, is for it to continue to consolidate, but if risk appetite remains firm in February, there could be a lot of money entering the market.
It’s too soon to call the sell-off over, other analysts say, pointing to the Federal Reserve as contributing to volatility.
“For stocks to stabilize and rebound, they need one, the Fed to stop providing hawkish surprises. Two, inflation data to peak and recede. And three, economic data to remain firm to eliminate thoughts of stagflation,” said Tom Essaye, founder of Sevens Report Research. “None of that happened last week, so Fed speak and economic data weighed on sentiment.”
The Fed has put the market on notice that the easy money days of the pandemic are over, but there are other factors at play, too, Colas said.
“While Fed rate policy has been getting all the blame for January’s equity market volatility, there is a fundamental component at work as well,” he said. “Q4 is coming in ahead of expectations but Q1 2022 estimates are going in the wrong direction.”
Marketts are reminiscent of September and October 2021, according to Colas, when volatility also spiked. If the market is going to rally, the next round of earnings reports need to exceed expectations, Colas said.