Since recovering from this week’s drop to $8,900, Bitcoin (BTC) price has struggled to gain above $9,600 and this level needs to flip from resistance to support before further upside can occur.
The largest digital-asset on CoinMarketCap has been gradually decoupling from stocks but some short-term correlation to traditional markets remains. This was observed on June 15 when BTC dropped below the $9,000 mark amid some heavy losses in the futures stock market.
Some investors and analysts worry that Bitcoin’s correlation to the stock market may break the use case narrative that it is a store of value or digital gold. Meanwhile, others believe it may be a healthy sign as it shows the digital asset is making headway by an increase in it’s representation across multiple traditional markets.
Hedge fund manager and CEO of Blockware solutions, Matt D’Souza, recently explained this in a Twitter thread:
“What is fascinating about BTC are the multiple short-term correlations that emerge. We have witnessed strong, short term correlations to Gold, to USD/CNY, and most recently US Equities. this signals an expanded breadth of market participants owning Bitcoin.”
According to D’Souza, the fact that Bitcoin displays short-term correlations to major markets and is also included in a growing range of institutional and retail portfolios shows the asset's investment utility in hedging against short-term market instability. D’Souza explained that:
“Each correlation indicates a different use case - Digital Gold, Vehicle for Capital Flight, Risk-On Asset (Disruptive Technology). The range of use cases maintain Bitcoin as an overall uncorrelated asset beyond short term intervals - a FEATURE for every portfolio.”
Bitcoin vs S&P 500 - Source: Skew.com
While short-term correlation to the stock market may or may not be looked at as a good sign for Bitcoin, concerns pertaining to volatility in the stock market remain as the coronavirus pandemic continues to weigh on economies across the globe.
Given that Bitcoin price is prone to undergo long squeezes which can sometimes trigger cascading liquidations like the one seen on Black Thursday, there’s a chance an accentuated drop in the stock markets could lead to another sharp sell-off in the crypto market.
BTC investors are still in the green
As economic conditions begin to improve across the globe it’s possible that equities markets will also stabilize. It's also worth noting that most crypto investors are still profiting from their Bitcoin positions.
Bitcoin and Ether addresses in profit - Source: glassnode
According to glassnode, 78.9% of BTC holders are profitable. This figure was derived from the realized price metric which takes the average "buy" price of the BTC is a wallet at the time they were transferred to said wallet and determines if the holder is in profit or loss.
Will these same holders dump BTC to recover losses in traditional markets? Possibly, but as D’Souza noted, they’re more likely to hold on to assets that make them money as “it’s all about human psychology.” According to D’Souza,
“The way retail/traders operate is once they go underwater they’re overwhelmed and upset so once they hit breakeven they sell and are relieved. This creates what’s called ‘overhead supply’. But if everyone is a winner then they’re holding and enjoying the ride and the asset moves up quicker. So the more winners the better the asset moves higher without people sitting around trying to get out at breakeven and creating selling pressure.”
Bitcoin is maturing
Another metric that aims to show a general break-even price for the network is the aggregate cost basis. This metric reveals that Bitcoin’s aggregate break-even price is currently $5,776 and that BTC holders as a whole are profiting 61% from buying Bitcoin. Ryan Watkins, research analyst at Messari recently tweeted:
“The insights provided by estimated cost basis can provide an interesting view into potential investor behavior. Using estimated cost basis observers can easily see at what price does a crypto asset, in aggregate, break-even.”
While these metrics are not perfect, they provide investors with a general notion of how Bitcoin holders feel about their investment and investor sentiment has proven to be a powerful force in both crypto and traditional markets.
Each metric provides a bird’s-eye view of Bitcoin and shows that as additional market participants from varying sectors allocate funds to BTC, the cryptocurrency it is maturing as an asset class.