The last 48 hours of trading have witnessed Bitcoin decoupling from the US stock market.
The cryptocurrency traded sideways with a bias modestly shifted towards bears. On the other hand, the S&P 500 moved in the opposite direction.
This lack of short-term positive correlation coincides with a booming DeFi craze.
Bitcoin appears to have decoupled for the US stock market as one broad phenomenon in the cryptocurrency market takes over traders’ conscience: the DeFi.
Also known as Decentralized Finance, the DeFi attributes to the ability to conduct financial operations without requiring a third-party. It comes in many kinds, including derivatives, lending, payments, and exchanges. The hype around the DeFi industry has helped protocol tokens log supersonic price rallies, especially in July.
The statistics attest to that. Bitcoin this month has disappointed bulls by fluctuating between marginal profits and losses. As of Thursday, the cryptocurrency was trading 0.19 percent lower on its month-to-date timeframe.
Bitcoin price rangebound between $9,100 and $9,400. Source: TradingView.com
On the other hand, DeFi tokens are having a blast. Chainlink, a project that offers industry-standard data to the DeFi sector, saw its native token LINK surging by more than 80 percent in July only.
Meanwhile, Sythentix, a decentralized asset platform, reported a 27 percent rally in its SNX token in the same month.
Synthetix (SNX) price rose 350 percent since April 2020. Source: TradingView.com
The in-house cryptocurrency trend is on the face. Traders, for time, have switched their interest from Bitcoin to DeFi-based altcoins.
That Correlation Break
Since March 2020, even a minor shift in the US stock market was sending Bitcoin in the same direction with additional momentum. The benchmark cryptocurrency practically tailed the S&P 500 for the last three months, with their realized correlation hitting a record high just last week.
Bitcoin-S&P 500 1-month correlation slips from 78.8 percent to 56.8 percent. Source: Skew.com
This week told a different story. On Wednesday, the S&P 500 rose 0.9 percent as encouraging reports on vaccine trials boosted investors’ risk-on sentiment. On the other hand, Bitcoin slipped 0.72 percent.
It was the same a day earlier. The cryptocurrency surged by a minor 0.22 percent despite plunging hard 1.70 percent in the same session. The S&P 500 contrasted that move by closing 1.34 percent higher.
DeFi may have played a substantial role in taking traders’ minds off the Bitcoin-S&P 500 correlation. Nevertheless, one can also assume that the cryptocurrency reacted to the looming macroeconomic fears far better than the US index.
It is because the S&P 500 rose despite alarming signals coming in the earnings season. Data service FactSet noted earlier last week the index’s share per earning have fallen by 45 percent in the second quarter. Its stocks are rallying despite those concerns, showing that investors are optimistic about the futures earnings.
But a resurgence in COVID cases in the US may end up dampening investors’ hopes. California and Florida have already imposed their second lockdowns to contain the infection, thereby hurting the positive economic outlook for the remainder of this quarter.
That explains Bitcoin’s wait-and-watch approach, as well. The cryptocurrency trade flat but maintains a reliable price floor above $9,000, proving its inclination to form higher highs once the DeFi craze settles down.