Bitcoin is possibly on the brink of a new bull run, yet a sudden and unshakable correlation with the stock market keeps getting in the way. With a potentially rocky Presidential election ahead and the pandemic still a critical factor, analysts say the stock market is “coiling,” ready to release pent up energy in one direction or the other.
The longer this sort of coiling continues for will result in an increasingly powerful move. If the stock market falls yet again, will Bitcoin suffer the sting of this coiling effect? Or is time for both markets to scream higher?
Stock Market Correlation Takes a Bite at Bitcoin in Early 2020
The stock market and cryptocurrencies are in very different stages of their market cycles at the moment. Stocks are potentially topping out after a more than 90-year secular bull market, while the fast-paced crypto market is just thawing out of a three-year winter.
At the start of 2020, as the stock market set new all-time highs, Bitcoin and crypto made its first major attempt at reclaiming highs, and it did. Bitcoin price held over $10,000 for a short period, but then news of the coming impact of the pandemic broke.
Lockdown conditions led to panic and fear, and a widespread stock market selloff into cash. The entire high-risk asset class of crypto was taken down in the collapse.
A correlation between the S&P 500 and Bitcoin has remained ever since. At times, the cryptocurrency shares a correlation with gold also, but its the stock market sentiment that’s a dark cloud hanging over all markets currently.
The return of fear, or at the very least, caution, has prompted indecision across markets, and a “coiling” effect, as analysts call it.
BTCUSD Daily S&P 500 Correlation Continues | Source: TradingView
How Will the Coiling Effect Impact the Leading Cryptocurrency?
Despite all that’s going on in the world socially, politically, and economically this “coiling” effect doesn’t necessarily mean bad news for Bitcoin or the stock market.
According to Bespoke Investment Group, this “classic” “coiling market” would suggest that the resolution will be higher when the breakout comes,” referencing a bull flag on the S&P 500, pictured below.
S&P 500 3-Day Bull Flag Targets 3850 | Source: TradingView
If the S&P 500 breaks out from a bull flag formation, it would be targeting a 15% move higher. The sizable move is large by stock market standards but is what is commonly seen intraday in crypto.
Bitcoin and other cryptocurrencies are far more volatile but have also been experiencing this coiling effect. In the below chart depicting historical volatility and the Bollinger Bands – a volatility measuring tool – Bitcoin shows both tools tightening.
BTCUSD Daily Bollinger Bands & Historical Volatility | Source: TradingView
Historical volatility has fallen to a level that has resulted in some of the crypto asset’s biggest moves ever. Meanwhile, the coiling effect analysts speak of can be visualized through the narrowing of the Bollinger Bands.
When the Bands “squeeze” an enormous move typically follows. If the stock market is coiling for a move up, and all signs point to an even bigger move in Bitcoin, all that’s left is for a direction to be chosen, and Bitcoin’s bull run may finally be on.
Featured image from Deposit Photos, Charts from TradingView