Cryptocurrencies are unpredictable by their very nature. So, when the question arises of whether Bitcoin will decouple from the stock markets in 2022, the answer is, of course, not that straightforward.
A month ago, one of the most interesting articles written about this topic told us how history showed that the now $103 trillion worth of cryptocurrency (bitcoin) closely follows the traditional stock exchange.
Will this trend continue to follow? Or will Bitcoin finally break free and set its own market in 2022? Let us explore this question.
Understanding Bitcoin Decoupling
Before we move further ahead, it is important that we first understand the meaning of decoupling.
Decoupling is a phenomenon when the returns of one asset separate from the expected pattern of correlation with the others.
In the context of Bitcoin, it means the price trend of bitcoin diverging from the traditional market patterns that it follows closely.
Currently, Bitcoin follows the route of three major indexes in the US, the S&P 500, NASDAQ and Dow Jones. Market watchers first observed this correlation in late 2021, when both assets, S&P 500 and Bitcoin, strongly rallied after an over-purchase.
Both of them then saw a bearish correction when they headed to 2022.
Hedging Against Inflation
One of the major USPs of Bitcoin has been its ability to hedge against inflation. People have been drawn to it because under the impression that they would be unaffected by the rapid changes of the fiat trade market.
It was the entire premise behind capping the Bitcoin supply to 21 million. It would ensure that the supply is low, enforce scarcity, and the value of the token would be high.
That all changed during the crypto boom of 2020 and 2021. Bank of America says that Bitcoin hasn’t acted as an inflation hedge for a long time. Since July 2021, it has been used as a Risk Asset.
The main reason behind that is the BTC’s close coupling with the NASDAQ 100. It was near an all-time high last year.
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The reason behind the correlation between the stocks
What is the main reason behind the tight correlation between Bitcoin, a seemingly unpredictable market, and traditional market trends?
“Heightened global tensions,” says Aaron Samsonoff, the Canadian Chief Strategy Officer and Co-Founder of the Crypto investment company Invest DeFy.
He has observed that Bitcoin’s value ties in with the traditional markets very closely during a time of market uncertainty.
Another reason is the interest of financial institutes. Unlike the general crypto crowd, whose bullishness about cryptocurrencies is based on emotions, and financial institutes have a more logical approach.
Large financial institutions buy cryptocurrencies and treat them as traditional assets. It moves the crypto price graph along the conventional lines.
Will Bitcoin decouple from the Stock Markets in 2022?
During times of calm or a bullish period, Bitcoin tends to diverge from the traditional market trends and does its own thing.
“It is because Bitcoin is treated as a Risk-on asset with the elements of a safe haven.” Samsonoff continued.
Bitcoin is still a budding child when it comes to the trading markets. As it matures, there is hope that the volatility it comes tethered will be lost. That relative calmness will decouple the Bitcoin from the traditional stock markets.
Although, that calm isn’t going to arrive anytime soon.
The current Russia-Ukraine situation has the traditional and the cryptocurrency market on edge.
However, it has had a positive effect on Bitcoin. Countries like El Salvador and Malaysia are on the verge of accepting Bitcoin as legal tenders. As the countries continue to move away from hard assets, the case of bitcoin’s decoupling might grow stronger.
Marie Taibouet, the Chief Marketing Officer of Gate.io, has one more thing to say about the matter.
“The Ukraine-Russia war and the Federal Reserve rate hikes should have had a positive effect on BTC’s price, especially considering how BTC has proven itself to be a solid hedge against inflation. However, none of that has happened,”
Even if the market is currently acting differently, experts say Bitcoin is moving increasingly towards more stable grounds.
Now, it is not the question of if Bitcoin will decouple from traditional stocks; it is the question of “when.”
The Downside of Decoupling
Marie noted that if Bitcoin decouples and retains a sense of stability, it will lose its “fun” aspect.
It is the volatility of the crypto market, whether it is positive or negative, that keeps the juices flowing in the crypto crowd. When that disappears, people might not be too bullish to invest in BTC.
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