Reiner Priggen

The Dow Jones plunged 2.84% on June 26, registering a 9.27% drop from its peak the month. As risky assets face fears of a correction, the vulnerability of a short-term decline in Bitcoin (BTC) prices may increase.

While many fundamental factors are causing a downward trend in the stock market, analysts point to the decline in liquidity as a major catalyst. When the Federal Reserve’s balance sheet began to contract, U.S. stocks fell consecutively.

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The correlation between Bitcoin Code and US stocks in recent months increases the likelihood of a drop in BTC prices.

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Holger Zschaepitz, a market analyst at Welt, explained that investors were initially motivated by the aggressive liquidity injection by the Federal Reserve. But, as liquidity slowed, several risks, such as the number of coronavirus infections, began to affect investor sentiment.

Correlation between the US stock market and global liquidity. Source: Holger Zschaepitz, Bloomberg

Correlation between the US stock market and global liquidity. Source: Holger Zschaepitz, Bloomberg

Referring to the graph showing the correlation between the S&P 500 and global liquidity, Zschaepitz wrote:

„This graph shows that capital investors are addicted to new stimuli like a drug addict. Without new liquidity from the Central Bank, a challenging global economy, high stock market valuations, and increasing cases of greed are important again.

Similarly, the price of Bitcoin fell sharply when the U.S. stock market initially declined. The Dow Jones saw its first big drop in the week of June 23. Bitcoin also experienced a sharp decline to $9,700 on the same day, registering a 7% drop in 24 hours.

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Over the past two years, Bitcoin’s price showed little or no correlation with stocks, moving according to its own market dynamics. But the surprising correlation between Bitcoin and stocks, especially in the second quarter of 2020, shows that investors are still very insecure.