BTC risks 50% drop as US stock correlation turns positive

• Correlation flip: Bitcoin's 20-week rolling correlation with the S&P 500 has turned positive, reaching 0.13 from a recent low of -0.5.
• Historical precedent: Since 2018, sharp increases in this correlation have often led to average Bitcoin price declines of approximately 50%.
• Market performance: Bitcoin fell 5.65% this week to approximately $68,700, while the S&P 500 dropped 1.90%.

Rising Correlation with Equities

Bitcoin has recently surrendered gains sparked by geopolitical tensions, moving back into alignment with traditional risk assets like US stocks. The 20-week rolling correlation between Bitcoin and the S&P 500 (SPX) recently shifted to 0.13. This move away from an inverse correlation suggests that Bitcoin is becoming increasingly sensitive to the same macro pressures affecting the broader equity market.

Analyst Tony Severino noted that this trend serves as a warning that a potential stock market collapse could drag Bitcoin down with it. If the historical pattern of a 50% correction repeats from current price levels, Bitcoin could see a downside target near $34,350. Some analysts are even projecting a range between $30,000 and $40,000 as far out as 2026.

Historical Patterns and Bull Traps

Data from 2020 and 2022 shows that Bitcoin price drops often lagged behind the initial shift in correlation. These periods were characterized by "bull traps," where Bitcoin briefly rallied alongside a rising S&P 500 correlation before eventually reversing and wiping out those gains. The current environment mirrors these past cycles, suggesting the market may be vulnerable to a significant sell-off.

Several macroeconomic factors are contributing to this bearish outlook:

• Elevated oil prices contributing to persistent inflation.
• Reduced expectations for Federal Reserve interest rate cuts.
• Broader risk-off sentiment across global markets.

Institutional Buying Slowdown

The risk of a price decline is further exacerbated by a pause in institutional accumulation. MicroStrategy (MSTR), one of the most prominent corporate holders of Bitcoin, did not report any new purchases this week. Their most recent acquisition was announced on March 16, when they added 22,337 BTC for $1.57 billion.

Currently, MicroStrategy holds a total of 761,068 BTC. During their last buying spree, Bitcoin outperformed US stocks with a 10.50% rally. However, without consistent institutional buying to provide a price floor, the cryptocurrency remains highly exposed to the downward momentum currently affecting the US stock market.