Bitcoin price holds steady as S&P 500 plunges to 110-day low

On September 20, the Federal Reserve issued a message that reverberated in financial markets: interest rates are expected to remain at the highest level in more than two decades, and may last longer than most market participants expect. This attitude comes against a backdrop of stubbornly high inflation, with core inflation hovering at 4.2%, well above the central bank’s 2% target, and unemployment at record lows.

As investors grapple with this new reality, a pressing question arises: Will the S&P 500 and Bitcoin (BTC) continue to underperform in the face of tightening monetary policy?

The impact of the Fed’s decision was swift and severe. The S&P 500 index fell to its lowest level in 110 days, a sign of growing investor unease.

Notably, the 10-year Treasury yield surged to its highest level since October 2007. The move reflects the market’s belief that interest rates will continue to rise, or at least that inflation will eventually catch up to the current yield of 4.55%. In either case, concerns are growing about the Fed’s ability to keep interest rates high without destabilizing the economy.

Bitcoin doesn’t necessarily follow traditional markets

An interesting development amid this financial turmoil is the apparent disconnect between the S&P 500 and cryptocurrencies, particularly Bitcoin. Over the past five months, the 30-day correlation between the two assets has not shown a clear trend.

This discrepancy suggests that either Bitcoin has anticipated the stock market correction or external factors are at play. One plausible explanation for this decoupling is the hype surrounding the possible launch of a spot Bitcoin ETF and regulatory concerns hampering the cryptocurrency’s upside potential. Meanwhile, the S&P 500 benefited from strong second-quarter earnings, but it’s important to remember that these numbers reflect conditions three months ago.

As the Federal Reserve sticks to its promise of high interest rates, the financial landscape is entering uncharted territory. While some may interpret the central bank’s stance as necessary to combat inflationary pressures, others are concerned that keeping interest rates high could burden households and businesses, especially as existing loans mature and must be paid at high rates. Refinancing at multiple interest rates.

Decoupling could be good for Bitcoin price

Several factors could cause cryptocurrencies to decouple from traditional markets such as the S&P 500. It could be a cause for concern if the government encounters difficulty issuing long-term debt. Failure to issue long-term bonds could signal fiscal instability, which would incentivize investors to seek hedging against a potential economic downturn. In this case, alternative assets such as gold and Bitcoin may become attractive options.

Related: Will Bitcoin price stay at $26,000 before $3B monthly BTC options expire?

Even if the dollar is strong, inflation will force the U.S. Treasury to raise the debt ceiling, causing the currency to lose value over time. This risk remains as investors seek to protect their wealth through assets less susceptible to inflation.

In addition, the state of the real estate market also plays a crucial role. If the housing market continues to deteriorate, it could have a negative impact on the overall economy and the S&P 500 Index. The interconnectedness of the housing market and the banking sector and the potential for a deterioration in consumer credit could trigger a shift into scarce and hedging assets.

There may be political instability around the world even during the 2024 US elections. This could create uncertainty and impact financial markets. Concerns about capital controls are growing in some countries, with historical instances of international financial embargoes highlighting the risks of governments imposing such controls, further driving investors toward cryptocurrencies.

Ultimately, unlike traditional stocks and bonds, cryptocurrencies are not tied to corporate profits, growth, or above-inflation yields. Instead, they move at their own pace, influenced by factors such as regulatory changes, the ability to withstand attacks, and predictable monetary policy. Therefore, none of the above scenarios need to occur for Bitcoin to significantly outperform the S&P 500.