- Investors should keep a close eye on Bitcoin and Ethereum’s correlation to the S&P 500.
- Bitcoin and Ethereum could turn bearish as the US looks closer to defaulting on debt.
You may have heard that Bitcoin [BTC] and Ethereum [ETH] were created as alternative asset classes that would make ideal inflation hedges. However, that was not the case during the 2022 crash, in which crypto prices crashed while inflation soared.
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The reality is that Bitcoin and Ethereum are highly correlated with the stock market. Economic factors in particular are essential in determining the market outcome.
As such, recent developments have created a lot of uncertainty about the performance of Bitcoin and Ethereum for the remainder of 2023.
Will the recent US credit cut affect Bitcoin and Ethereum?
Credit rating agency Fitch Ratings recently downgraded its US debt rating from AAA to AA+. Since then, there has been speculation that a credit crunch and higher interest rates are imminent.
Investors now fear that a payment default is on the way and that it could lead to inflation and an economic recession. We must first look at how these factors can affect Bitcoin and Ethereum.
Cryptocurrencies were highly correlated with the stock market. The latter usually crashes in difficult economic times. If Bitcoin and ETH are still correlated with the SP500, they could also turn bearish.
Interestingly, recent findings suggest there was still a significant level of correlation consistent with investors’ continued caution.
📊 #Bitcoin And #Ethereum remain firmly anchored with the ebb and flow of the #SP500. The dollar has appreciated in recent weeks, which has historically presaged market pullbacks. Look for reduced correlation as a breakthrough signal for #crypto. https://t.co/cMB4w8Abv3 pic.twitter.com/1NA8KfitzN
— Santiment (@santimentfeed) August 3, 2023
According to analyst Sean Foo, the US government is threatening a debt spiral that could eventually trigger a recession. Stocks could crash under such circumstances, and the correlations between Bitcoin and Ethereum mean that cryptocurrencies could also run into trouble.
On the other hand, many still believe that both Bitcoin and Ethereum are still good hedges for when the economic collapse finally happens. This result is possible under low correlation conditions. Lower demand for the dollar would likely also be one of the biggest factors driving demand for Bitcoin and Ethereum.
How soon will that happen?
Mr. Sean Foo noted that the recent US credit rating downgrade has unexpectedly increased demand for the dollar. He explained that the dollar’s global reserve currency status meant that the currency was in high demand from around the world. In other words, there may not be much effect in the short term.
How much are 1,10,100 BTC worth today?
The analyst believes that US credit amortizations could increase and that this would increase the risk of default on bond yields. It could force the US to print more money, depreciating the dollar.
If this happens, demand for assets such as gold, Bitcoin and Ethereum will likely be higher. However, that result is not expected to happen within the next 12 months.