Bitcoin Weakness Signals Fragility in U.S. Stock Market Rally
Bitcoin’s recent weakness may signal that the current rally in the U.S. stock market is less robust than it appears, even as the S&P 500 notched a record close on Wednesday. Tyler Richey, co-editor at Sevens Report Research, shared this insight with MarketWatch.
Bitcoin’s Performance This Month
The largest cryptocurrency, Bitcoin (BTCUSD), has been trading within a narrow range of $93,000 and $100,000 throughout January 2024. As of Wednesday, Bitcoin was trading near $96,600, which is approximately 12% below its all-time high of $109,225 set on January 20, shortly after Donald Trump was inaugurated as President of the United States.
“There was a lot of froth there for risk assets after the election,” Richey remarked in a phone interview, reflecting on the market’s volatile behavior. Following the election in November, both Bitcoin and stocks experienced rallies as investors anticipated pro-growth policies and favorable regulations from the Trump administration.
The Relationship Between Bitcoin and Stock Markets
Historically, Bitcoin has mirrored the movements of risk assets, especially stocks. However, investors have been increasingly wary as Trump continues to threaten and implement tariffs on various U.S. trading partners. Such geopolitical tensions have raised concerns about the potential for rising inflation, which could hinder further cuts to interest rates by the Federal Reserve.
The Federal Reserve’s recent minutes indicated that a small number of Fed officials see limited room for interest rate reductions, a sentiment reflected in current market expectations. According to the CME FedWatch Tool, there is now an 81% probability that the Fed will implement at least one more rate cut this year.
Contrasting Performances of Bitcoin and Stocks
Despite these macroeconomic uncertainties, the S&P 500 achieved a record high close on Wednesday, while Bitcoin has shown sluggish performance over the past week. Richey suggests that this divergence could act as a “cautious signal” regarding the sustainability of the stock market’s rally.
Bitcoin is often considered a proxy for liquidity in the marketplace. As noted by Bitcoin analyst Sam Callahan, Bitcoin has moved in tandem with global liquidity approximately 83% of the time over any given 12-month period—more than any other major asset class. Richey emphasized that Bitcoin’s weakness typically indicates a macroeconomic negative and is historically correlated with declining liquidity, which bodes ill for stocks.
Stock Market Status as of Wednesday
On Wednesday, U.S. stocks broadly closed higher, with the S&P 500 and the Dow Jones Industrial Average both gaining 0.2%, while the Nasdaq Composite rose by 0.1%. The contrast between the buoyant stock market and Bitcoin’s recent struggles could suggest underlying fragility in the stock market rally.
Bitcoin’s Technical Analysis
From a technical standpoint, Bitcoin’s price action has taken on an “increasingly heavy tone.” Futures have fallen below their 21-day moving average, approaching a critical support level at around $91,500. Richey asserts that the Bitcoin rally has stalled and has begun a sideways drift away from its record highs, as evidenced by momentum indicators and relative strength readings compared to gold, typically regarded as a safe-haven asset.
If Bitcoin breaches the key support level of $91,500, it may be poised to fall further to around $73,400, the high reached in the first half of 2024.
On-Chain Data Signaling Bearish Trends
Furthermore, on-chain data analysis raises additional concerns. Analysts from crypto research firm CryptoQuant have indicated that Bitcoin could fall to approximately $86,000 if its demand growth doesn’t see an improvement. This analysis leverages blockchain data to glean market trends and investor behaviors.
Currently, Bitcoin’s apparent demand—which measures the difference between the amount mined and the inactive supply held for over a year—dropped from a high of 279,000 in December to about 62,500 as of Wednesday. In conjunction with this, Bitcoin’s network activity continues to decline, as shown by CryptoQuant’s Bitcoin network-activity index, which is at its lowest since February 2024.
Conclusion
In summary, Bitcoin’s current struggle suggests a broader uncertainty in the financial markets, particularly concerning the sustainability of the recent stock market rally. With key support levels at risk and declining demand and network activity, investors will need to monitor the evolving landscape closely. As always, staying informed and cautious in volatile markets remains crucial for navigating these uncertain economic waters.