Bitcoin While stocks remain buoyant, the start of the year has been painful. But stock traders are now running out of luck as rising bond yields put pressure on valuations.
In the first five weeks of this year, the price of Bitcoin plummeted from around $90,000 to nearly $60,000, according to CoinDesk. The decline marks a sharp decoupling from the S&P 500 and Nasdaq, which were trading at or near all-time highs.
Analysts wonder how long this divergence will last — whether Bitcoin will rebound quickly or if the stock market will eventually catch up to Bitcoin’s weakness.
The latter seems to be happening. Since the outbreak of the war with Iran on February 28, concerns about inflation and weakening expectations for a rate cut by the Federal Reserve have pushed U.S. Treasury yields sharply higher, putting pressure on the stock market.
The weakness in stocks comes weeks after Bitcoin’s decline, underscoring the cryptocurrency’s role as a leading indicator of traditional risk assets. Traders in traditional markets often look to Bitcoin to gauge overall risk sentiment, especially on weekends or when traditional exchanges are closed.
Yields rise, stocks fall
As of press time, the U.S. 10-year Treasury bond yield has risen to 4.41%, the highest since August 1. Benchmark borrowing costs have risen 48 basis points since the start of the Iran war. The U.S. two-year Treasury yield jumped 57 basis points to 3.94%.
Treasury yields are considered the benchmark for the risk-free interest rate, and the cost of borrowing in the economy, such as corporate bonds, mortgages, student loans, etc., are priced relative to Treasury bonds. So when yields rise, lenders often raise lending rates to maintain spreads, pushing up borrowing costs for businesses and consumers. This has led to risk aversion in the stock market, which we are now starting to see.
In early trading on Monday, Nasdaq futures tied to Wall Street technology stocks fell to 23,890 points, their lowest since September 11. S&P 500 e-mini futures fell to 6,505 points, also their lowest since September.
CoinDesk recently highlighted that the price patterns of major stock indexes are strikingly similar to Bitcoin’s price action before the crash. The similarity has raised concerns among analysts, suggesting stocks could be at risk of further declines if this pattern continues.
“Bitcoin has been at the top of the risk asset iceberg, and its price collapse could be an early stage of a broader decline — especially if a spike in commodity volatility spills over into equities,” Mike McGlone, senior commodities strategist at Bloomberg, said in a recent report.
Bitcoin holds steady
Bitcoin has largely stabilized between $65,000 and $75,000 in recent weeks after plunging earlier this year. As of this writing, the cryptocurrency is changing hands at $68,790.
However, options markets are pricing in extreme fear, leading to record bias in put options, or derivatives contracts that offer protection against a decline in Bitcoin’s price.
