Key facts: Bitcoin (BTC), on many occasions, takes the lead by reacting quickly to different events. The digital currency is «a potential indicator of the future direction» of other markets. A new analysis by Paul Franke, an American investor with more than 30 years of experience, distinguishes the relevance of bitcoin (BTC) for stocks. Far from what some think, he maintains that his movement usually anticipates the direction of the stock market, and not the other way around. It notes that “bitcoin has tended to lead the stock market trend (both up and down), to varying degrees, throughout its short history since its invention in January 2009.” In this sense, he emphasizes that Its price movement serves as an indicator of the stock's potential movement.
“Without public deficit spending around the world, I doubt bitcoin has a good reason to exist. Believe it or not, this makes bitcoin (and other cryptocurrencies as a group) an excellent indicator of future stock market action, functioning as a great signal of the flow of venture money.” Paul Franke, stock market researcher and analyst.
To put it in perspective, remember that, in 2018, The price of bitcoin experienced a sharp drop, just like the S&P 500 (SPX) two months later. Likewise, it indicates that, both in 2020 and 2021, this index went down months after the crypto asset did so. This can be seen below.
Above is the price performance of the S&P and below is that of bitcoin. Source: Seeking Alpha.
In other words, he specifies that “historical trading evidence suggests that bitcoin tends to peak earlier than the S&P 500 index.” In this way, he sees that Its analysis is key to detecting possible changes in direction of the stock market. It should be noted that the S&P 500 is the index that includes the shares of the main 500 companies listed on the stock market in the United States. Therefore, it works as a key reflection of the performance of the stock market that impacts globally. According to the specialist, bitcoin's movements can be attributed almost entirely to two factors: changes in the liquidity of the financial system and the desires of investors to own a decentralized digital currency as a hedge against the printing of fiat money.
According to Franke, stock investors should boost bitcoin
Given the anticipated direction that bitcoin has historically shown to the stock market, Franke warns to take this into account when operating currently. “If you're bullish on US stocks, you should be rooting for bitcoin, plain and simple,” he says.
The price of the S&P 500 has marked a new all-time high this month, while bitcoin has done this in March. With such a scenario, he mentions that the financial terrain mantra that he says “sell in May and leave” can prove very prophetic this year. For the analyst, the movement of BTC may indicate a negative change in market liquidity. “If bitcoin and digital cryptocurrencies succumb to strong selling in June-July, the outlook for the stock market will sour dramatically for the second half of 2024 and early 2025,” he believes. According to the analyst, if a recession is looming, with a rapid drop in liquidity in the financial system, both the price of the S&P 500 and BTC could decline for many months. “That's why investors should keep an eye on bitcoin prices in the future, even if you don't own cryptocurrencies,” he adds. Meanwhile, analysts like Florian Grummes predict bitcoin will reach new all-time high prices after the northern hemisphere summer. As reported by BitcoinDynamic, the argument behind this is that in such a period, which runs from June to September, the markets tend to experience falls. However, as seen in the graph, the price of bitcoin has been showing recovery so far in May, which was exacerbated with approval of Ethereum exchange-traded funds (ETFs) in the United States last week. Currently, it is trading around USD 70,000, which is 5% below its all-time high.
Bitcoin price from its all-time high. Source: Seeking Alpha. Therefore, as soon as the ETFs are launched, they could prove to be a catalyst for the bitcoin and cryptocurrency market that portends possible positive movements for stocks, if the macroeconomic scenario does not discourage risk demand.