How the correlation between Bitcoin price and S&P 500 may shape its next move.

Investors' perception of Bitcoin (BTC) is undergoing a transformation, making it a typical risky asset. This means that the relative performance of Bitcoin's price today is similar to the performance of stocks on the NASDAQ and S&P 500 indices.

To illustrate this, Bitcoin has shown a correlation of up to 76% with NASDAQ 100 over the past year. Although the volatility of BTC has significantly decreased in recent years, analyzing the macroeconomic factors affecting traditional stocks can help us assess the price potential of Bitcoin.

In the context of Bitcoin decreasing by about 4% over the past month, it is clear that the optimism regarding the Federal Reserve's interest rate cuts has not yet led to a distinct bullish trend.

BTC price chart | Source: Bitcoin MagazineMarket observers are currently awaiting a viable decision regarding interest rate cuts from the Fed in the upcoming FOMC meeting next week. This decision could provide a temporary boost for both BTC and traditional stocks, but what other factors could influence Bitcoin prices?

How the Fed's interest rate cuts and ETP are tying Bitcoin prices to tech stocks?

The recent direction of BTC has confirmed a stronger link with the sentiment surrounding US tech stocks. To put this into context, the correlation between Bitcoin prices and the NASDAQ has risen to 92% over the past six months.

As we can see, this correlation has begun to increase significantly since September of last year and has remained high to this day. Many macro factors have contributed to this increase, most notably the strong interest rate cuts from the U.S. central bank.

Specifically, the Fed lowered the benchmark interest rate by 50 basis points in September 2024, leading to an increased correlation between cryptocurrencies and traditional stocks. Additionally, the launch of several Bitcoin ETP products by traditional investors in the past year has also contributed to strengthening this correlation.

From a risk management perspective, it is clear that adding Bitcoin to the current technology stock-heavy portfolio offers little diversification benefit to investors. However, most experts in the Web3 field believe that Bitcoin will eventually affirm its position as "digital gold" and decouple from stocks.

Until that happens, investors need to closely monitor important updates from the market, especially the possibility of an interest rate cut by the Federal Reserve on September 17.

Smart money bets on interest rate cuts

While altcoins are showing some momentum in the cryptocurrency market, the likelihood of a widespread price increase will rise if macro uncertainty eases. The ideal scenario for Bitcoin's price would be a clear confirmation that the Fed will continue to pursue the anticipated interest rate cut path, or even accelerate this process.

However, any hesitation from Chairman Jerome Powell, which could reflect a hawkish stance, may slow down the rally of BTC.

The VIX index (CBOE Volatility Index) is currently near its annual lows, around 14.76. This indicates that volatility in the U.S. stock market is relatively low, in line with the general sentiment being calm or optimistic.

However, smart money is clearly betting big on interest rate cuts, as Bitcoin ETFs have recorded a net inflow of over 1.9 billion USD in just the past three days.

Mr. Teacher