Bullish or bearish? Correlation between bitcoin and S&P 500 back to 10-month low

The correlation between Bitcoin (BTC) and the S&P 500 has hit a 10-month low.

Historically, this is a bullish sign for the dominant cryptocurrency.

A low correlation with the S&P 500 is a bullish factor for Bitcoin because it means that BTC is not lagging the broader risk market. Santiment analysts:

„The correlation between #Bitcoin and #SP500 $SPX is great for identifying when $BTC can fluctuate independently of traditional markets. We’ve found that #crypto is at its best when this correlation is low… and our 30-day correlation model shows it’s at a 10-month low.“

The correlation between Bitcoin and the S&P 500.

Why bitcoin is likely to outperform the S&P 500 over the medium term

Bitcoin’s correlation with the S&P 500 could fall or remain low in the short term for two reasons.

First, the U.S. stock market could correct in a take-profit pullback while Bitcoin continues to rally.

Second, the U.S. stock market could rise in tandem with BTC, but Bitcoin is posting a larger gain over a longer period of time.

Major investment banks like JPMorgan believe the U.S. stock market is in the midst of a bull run. Strategists say U.S. stocks could suffer a setback in January if equities continue to gel.

Nonetheless, strategists expect momentum in stocks to spill over into 2021. If so, the latter scenario is more likely, in which Bitcoin would need to outperform the S&P 500 to maintain a low correlation.

The post-halving cycle remains the most compelling case for a sustained Bitcoin uptrend in 2021, which could allow BTC to outperform the S&P 500.

By way of background, Bitcoin goes through a block reward bisection every four years. The last two halvings occurred in 2012 and 2016, and after each halving, the BTC price rose over a long period of time.

A Block Reward has historically had a positive impact on the price of Bitcoin by affecting its scarcity. After each halving of the Block Reward, the amount of BTC that miners can mine decreases. Consequently, there is a smaller number of BTC produced each day. Since the supply of BTC is fixed, this makes BTC scarcer.

Bitcoin tends to recover for 12 to 15 months after each halving. Considering that the last halving occurred in May 2020, BTC could recover by mid-2021 if the bull cycles of the past continue.

The price of bitcoin.

Key technical levels in the near term

In the near term, the $19,400 resistance level remains the key technical level.

Bitcoin has recently corrected to $17,600 after failing three consecutive tests to rise above $19,400.

If bitcoin price rises and stays above $19,400, it would increase the likelihood of another rally above the all-time high.

Whales and miners have sold off heavily in the last two weeks, and the possibility of wealthy investors getting in above $20,000 is also strengthening.