by Chad Steinglass

Start of September

With September mercifully in the rearview mirror we can finally look back and take stock of what was a difficult month across almost every asset class, save oil and energy markets. Looking at Bitcoin, September started with a bang, reclaiming 50k as the rebound that started late July extended. Labor Day weekend started with promise, but we started the month off on the wrong side of the bed and a steep correction as US markets opened on Tuesday after the long weekend. As the month progressed, we saw a particular market dynamic emerge that is the well-deserved badge of a mature risk asset, but also led us down a bumpy road: Bitcoin started to trade with high correlation to equity markets.

Minefield of Potential Hazards

Towards the middle of the month, financial markets were navigating through a minefield of potential hazards. The September Fed meeting brought the most hawkish statements from chairman Powell that we’ve heard in years, and the writing was on the wall that the Fed would start to taper asset purchases soon. Treasuries started to fall and interest rates started to rise, the US dollar strengthened significantly, easily topping highs of the year. At the same time, the Chinese real estate development conglomerate Evergrande appeared ready to collapse, potentially bringing the Chinese real estate market with it, and the US Senate was in a stalemate over the looming problem of hitting the debt ceiling. Every day that each of these worries gripped, markets drove equities,Bitcoin and Ether down. Every day that we saw some relief from worry, markets drove them all up. Crypto was coupled to equities and bonds, and the road was rocky.

Decoupling Begins

Then just as September was coming to a close, the dynamic shifted. While equities and bonds fretted over Evergrande and a failed vote on an infrastructure bill in the House of Representatives, crypto found its calling. It’s unclear exactly what caused the shift in dynamic, and it’s entirely possible that it was as simple as the conventional wisdom in the crypto world that September is a bad month and October is a good one, but on that Thursday night Bitcoin was able to close just barely over the psychologically important 43k level predicted by PlanB’s Stock to Flow model, and very suddenly became decoupled from equity markets. This decoupling has continued throughout October so far, and that’s a good thing for crypto, at least for the time being.

October: Crypto at the Professional Level

I mentioned earlier that correlation with other asset classes was a badge of maturity. I interpret that correlation to mean that investors are taking crypto, especially Bitcoin and Ether, seriously and are trading them alongside portfolios of equities and bonds and selling them when they need to reduce overall macro risk exposure and buying them when they want to increase overall macro exposure. This could mean that crypto is playing the game at the professional level. But periods of high correlation also mean that outsized upside moves will probably be difficult to come by. In order for Bitcoin and Ether to have a hope of another exponential move higher, they need to break that coupling. They’ve broken it this week, and we don’t know how long it will last or if we might actually see an acceleration to the upside, but for now the stage is set, and that should be music to our ears.

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