Bitcoin's Correlation with Tech Stocks Surge: What's Next for Cryptocurrency?

Bitcoin surged to its highest price level in nearly a month on May 20, surpassing the $66,000 threshold. Most other cryptocurrencies followed suit, exhibiting an upward trajectory, with altcoins such as Solana, Avalanche, and Bitcoin Cash (BCH) all experiencing double-digit growth.

For a long time, Bitcoin advocates have touted it as the digital equivalent of gold - an asset uncorrelated with traditional markets, unconstrained by any government, and less likely to be influenced by external forces or factors. However, recent price fluctuations in Bitcoin have challenged these assertions.

So far this year, Bitcoin has surged over 58%, while the NASDAQ 100 Index, known for its concentration of technology stocks, has posted an 11% gain. According to Bloomberg, the two have moved in an increasingly correlated manner: The 90-day correlation coefficient between Bitcoin and the NASDAQ 100 has ascended to 0.46, marking the highest level since late August of the previous year.

"People are refocused on crypto as a growth asset or an asset that represents network value," said Joshua Lim, co-founder of trading firm Arbelos Markets. "The ability of it as a technology and transfer of value mechanism, and that means that it's gonna be more correlated to other assets that are also pretty growthy like Nasdaq, tech equities, those sorts of things.”

After showing a high correlation with tech stocks, Bitcoin is increasingly resembling a growth asset. Analysts contend that a potential interest rate reduction by the Federal Reserve would likely bolster risk assets, with cryptocurrencies anticipated to reap similar benefits." It'll be interesting then to see what happens if the Feddoes cutrates in the months ahead," said Toby Winterflood, Chief Product Officer at CCData. "I wonder if Bitcoin will behave in the same way as it did previously, being perceived as that kind of riskier asset, or whether it'll start actually becoming an alternative asset recognized by traditional markets."

Cryptocurrency analyst Ali Martinez predicts that the demand for Bitcoin will soon surpass its supply, driving up its value. "Observing Bitcoin's Balance on Exchanges can corroborate these supply and demand dynamics. Since early May, more than 30,000BTChave moved to private wallets for long-term holding, showing confidence among holders in Bitcoin's future value." "When supply exceeds demand, the asset's price tends to decline. Conversely, when demand outstrips supply, the price usually rises. These same principles apply to Bitcoin," Martinez wrote last Thursday on X.

Last week, the Financial Times reported that the Chicago Mercantile Exchange (CME) plans to offer Bitcoin spot trading on its platform. Analysts at Citigroup stated in March that inflows into Bitcoin ETFs have been a major factor driving the price of Bitcoin. If CME were to provide institutional investors with the opportunity for spot trading, a significant influx of capital might occur, potentially exerting a greater impact on the price of Bitcoin itself.

As a large traditional financial institution, the CME can cater to the needs of regulated entities such as hedge funds, family offices, and pension funds that are familiar with Bitcoin acquisition methods. Moreover, the growing interest and acceptance of cryptocurrencies among traditional financial institutions could lead to increased mainstream adoption of digital assets.

The latest inflation data has revived bullish sentiment as Wall Street believes the Federal Reserve may cut interest rates several times this year. However, the Fed has not yet curbed inflation, which may suggest that investors' optimism is premature.

What's more, CME options data shows that institutions are still skeptical of a near-term Bitcoin price rally: CF Benchmarks analyzed options trading data on the CME, regarded as a barometer of institutional activity, which showed that implied volatility for short-dated out-of-the-money put options was higher than that for calls following this week's US CPI release. These options are based on CME's cash-settled standard Bitcoin futures contract, which is sized at 5 BTC. CF Benchmarks said the higher implied volatility for out-of-the-money puts compared to calls suggested investors remained cautious about near-term downside risks and were willing to pay a premium for protective puts.

Crypto researcher Alex Wacy asked if it's "fair to assume that the way to $80K is now open?"