Market Wrap: Bitcoin Sell-Off Deepens as Correlation With Stocks Rises

Bitcoin (BTC) continued its descent on Monday, briefly dipping below $40,000 and tracking losses in global equities.

Investors appear to be reducing their exposure to speculative assets, including stocks and cryptos, amid concerns about inflation and slower economic growth. Further, the 10-year Treasury yield rose to a new three-year high on Monday at 2.78%, which reduces the present value of expensively priced tech stocks.

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Gold, a traditional safe haven, traded higher on Monday, while the Chicago Board Options Exchange's CBOE Volatility Index (VIX), a measure of the stock market's expectation of volatility based on S&P 500 index options, rose above 20, similar to what occurred in early February. That indicates uncertainty among investors.

In crypto markets, most alternative cryptocurrencies (altcoins) underperformed bitcoin on Monday. Ether (ETH) was down 8% over the past 24 hours, compared with a 16% drop in THORChain's RUNE token, and a 6% decline in BTC over the same period.

For now, technical indicators suggest lower support at $37,500 and $40,000 could stabilize BTC's down move.

Bitcoin's pullback below $43,000 triggered a wave of long liquidations over the weekend.

Liquidations occur when an exchange forcefully closes a trader’s leveraged position as a safety mechanism due to a partial or total loss of the trader’s initial margin. In this case, traders who were long bitcoin are forced out of their positions as price drops, which can accelerate declines in the spot market.

Still, long liquidations over the past few weeks have not reached an extreme, especially compared with early March. That could point to further selling pressure until BTC experiences a more decisive down move with high trading volume, which typically indicates capitulation among short traders.

Trading volume across bitcoin spot exchanges remains low, according to CoinDesk data. Further, there was no uptick in volume over the weekend despite BTC's 7% price dip.

The chart below shows the ratio of buy volume versus sell volume in bitcoin's perpetual swaps market (30-day moving average), which is a type of crypto derivative trading product. The ratio dipped below one, suggesting dominant bearish sentiment among bitcoin traders.

Despite crypto-specific events, such as The Luna Foundation Guard's (LFG) accumulation of 40,000 BTC, bitcoin has largely tracked moves in stocks over the past year.

The chart below shows a new high in the 90-day correlation between bitcoin and the tech-heavy Nasdaq 100 index. While the correlation is still relatively low, it has remained elevated since the pandemic-induced sell-off across speculative assets in 2020.

In a Monday newsletter, FundStrat, a global advisory firm, wrote that macro uncertainty could outweigh LFG's reserve purchases. "Following previous LFG purchases, we witnessed a rise in realized market cap as other [traders] followed LFG's lead," the firm wrote. "However, realized market cap has remained flat since this latest purchase, indicating marginally less appetite for buying this weekend's dip."

It appears that investors have tightened their risk budget, which is typical during times of market turbulence. After all, global volatility has been compressed throughout the past 15 years of unprecedented monetary stimulus.

Most digital assets in the CoinDesk 20 ended the day lower.

There are no gainers in CoinDesk 20 today.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.