Bitcoin Loses Momentum as Correlation with Tech Stocks Breaks: Analysis

Bitcoin is undeniably having a great year, but it’s losing momentum just when it might have been expected to kick into high gear.

The coin’s usually strong positive correlation with tech stocks, especially the biggest tech and growth stocks – whose price has exploded in recent weeks – has completely broken, journalist Jamie McGeever wrote in an analysis for Reuters.

Bitcoin’s 30-day rolling correlation with the Nasdaq index last week reversed to its most negative reading in six months, and the correlation with the NYSE FANG+TM gauge collapsed to its most negative level in nearly four years.

The latest burst of investor optimism that the boom in artificial intelligence (AI), ChatGPT software and advanced chip technologies will be transformative for economies is leading gains in so-called Big Tech.

Perhaps cryptocurrencies were expected to ride the wave, but no. Bitcoin broke the $31K mark in mid-April, posting a year-to-date gain of almost 90%, but is now trading around the $27K level, narrowing its 2023 gain to around 63%.

And while billions of dollars have poured into Big Tech in recent weeks, Bitcoin trading volumes and demand have been falling.

Matt Weller, an analyst at StoneX, said there simply isn’t a compelling reason to buy bitcoin right now, with the AI ​​boom still holding potential.

“ChatGPT is what cryptocurrencies want to be – an out-of-the-box product for the mass market with a huge adoption rate,” he said, adding: “Crypto-currencies have lost their luster amid this gold rush. Or should I say AI fever’.

The magnificent seven

Bitcoin, the broader crypto market, and tech stocks typically move in tandem on the assumption that they will be a fundamental part of the breakthrough, growth-generating, efficient economies of the future.

Weller believes the divergence really widened on April 25, when Microsoft became the first of the US tech giants to report quarterly results that beat estimates.

Since April 25, the NYSE FANG+TM index of large technology and growth stocks has risen 24%, nearly triple the broader Nasdaq. The price of Bitcoin, on the other hand, is down by a percentage.

Whatever is blowing up the big tech stocks is certainly not moving Bitcoin’s boat.

The AI ​​boom is gaining momentum despite rising Treasury yields and rising interest rates. This highlights the underperformance of the largest cryptocurrency and suggests that outside the world of Big Tech, investors are much more prudent.

In fact, just seven U.S. tech stocks have led to all of the S&P 500’s positive returns so far this year, according to analysts at Barclays.

Looking at the picture even further, if Bitcoin is indeed the hedge against the dollar that its fans proclaim it to be, then it faces strong headwinds from the Fed’s “higher for longer” interest rates and rising US Treasury yields securities, which again make the US currency appreciate.

Peripheral search

Analysts at research firm Vanda Research point out that while retail investors have only been “peripheral” participants in the recent AI and tech boom, they have cooled even further to crypto-assets.

The company’s data shows that the movement of cash flows from cryptoassets to AI has pushed the flow of funds into the crypto sector to post-pandemic lows, to $3.6 million a day from over $10 million a day a few weeks earlier.

“If the outperformance of AI stocks continues, we expect retail traders to start chasing other names more aggressively… further reducing demand for crypto stocks,” Vanda analysts said earlier last week.

Vanda’s Marco Iahini points out that he’s surprised that cryptocurrencies haven’t followed tech stocks on the way up. They will catch up at some point, but not before the AI ​​rally first extends to smaller-cap tech stocks and growth stocks.

How far can the Bitcoin rally go? Analysts at Standard Chartered believe it could reach $100,000 by the end of 2024. The so-called cryptozyme may be over, but it will take a dramatic turnaround in investor sentiment and cryptocurrency adoption to make this a reality .