Bitcoin vs Nasdaq: An Elusive Correlation?

Bitcoin and Nasdaq have been moving in tandem in recent months, rallying and selling off about the same time. But the relationship between the two may be elusive.

"Since the middle of 2020, we have seen an increasingly positive correlation between Bitcoin and risk-on assets, particularly tech stocks," says Amber Ghaddar, co-founder of AllianceBlock. That's obvious when the price of the digital currency is plotted against the Nasdaq index, though it isn't clear whether Nasdaq drives Bitcoin down or Bitcoin drives Nasdaq down.

Still, Ghaddar has a reasonable explanation for the positive correlation between Bitcoin prices and Nasdaq's performance. The foray of institutional players into the cryptocurrency markets, according to Ghaddar. "The positive correlation became dominant with the arrival of institutional players," he says. "Changes in the Nasdaq can act as a good bellwether for changes in Bitcoin's price except when there are idiosyncratic drivers -- the news of KPMG adding crypto to its balance sheet that we saw two weeks ago is a good example."

Meanwhile, Arpit Agrawal, a serial entrepreneur and co-founder & chief engineering officer of Cion Digital, provides further insight into how Nasdaq selloffs are dragging Bitcoin down. "Many have exposure to both Nasdaq stocks and Bitcoin," he says. "When they sell Nasdaq stocks (which causes Nasdaq to go down), their percentage exposure to Bitcoin will increase. So to rebalance their portfolio, many people usually prefer to sell Bitcoin in proportion to Nasdaq stocks. This causes Bitcoin to go down. So yes, we can say that Nasdaq is dragging down Bitcoin since Nov 2021."

James Wo, CEO & founder of DFG, is on the same page. "In the last couple of years, the most important factor pushing crypto markets to grow is the entry of institutional investors, which are greatly exposed to traditional markets, which means the first assets that will be sold in moments of significant downturn are risk assets such as cryptocurrencies," he says.

But Kunal Sawhney, CEO of Kalkine Group, sees more factors at play, like the unpreceded monetary and fiscal easing during the Covid-19 pandemic recession. "Keeping the interest rate at a near-zero level coupled with government aid like stimulus checks and PPP may have ensured Americans had cash," he says. "This generally bodes well for risky investment instruments like stocks and cryptocurrencies that might provide higher returns than fixed return instruments."

"Evidence of this could be the fact that the Nasdaq Composite, the Dow, the S&P 500 and the TSX Composite indices all broke their all-time high records multiple times during the latter half of 2021," he adds.

Simply put, easy money policies lifted all assets up, including the most speculative ones like cryptocurrencies and the shares of smaller profitless companies listed on Nasdaq.

But as easy money policies are coming to an end and are about to be replaced by tight money policies, including several interest rate hikes, investors are fleeing risky assets altogether. Thus, the frequent selloff that has been seen in cryptocurrencies and Nasdaq, exacerbated by geopolitical risks like the standoff between Moscow and Washington over the fate of Ukraine.

Still, Udayan Roy, professor of economics at LIU Post, thinks it is almost impossible to compare Bitcoin and Nasdaq and find any patterns." Nasdaq went from 4,654.85 to 13,716.72. So, Nasdaq grew by a multiple of 2.95 for this period," he explains. "Bitcoin went from 218 to 40,553.82. So, Bitcoin grew by a multiple of 186.03. For this reason, it is unlikely that any kind of link can be found between the two."