Three-day S&P 500 Stock Index price chart with the H&S formation
Being a risk-on asset, Bitcoin’s price has consistently been highly correlated to the price action of the S&P 500. A portion of profits realized in S&P and Nasdaq markets have poured into the cryptocurrency market in the past. Bull markets have started in the stock markets and ended in the crypto markets.
The same cycle applies when there is a downturn in the markets. Money starts to flow out of cryptocurrency markets, followed by the stock markets. And then, as a bear market ensues, all risk-on assets become correlated to the major stock markets. As a result, developments in the S&P 500 are very crucial for Bitcoin now, as they could determine whether we will have an extended bear market this year.
4. Yield for the 2-year US government bonds
On the other hand, the yield chart for the 2-year US government bonds contradicts the current outlook of the cryptocurrency market and the stock markets.
Bond market yields are inversely correlated to the stock markets and thus cryptocurrencies. U.S. government bond yields have been surging since October 2021, in response to the accelerating inflation and geopolitical tensions. The 2-year US government bonds are used as the benchmark indicator in the market to measure short-to-mid term appetite for risk-on assets.
If the yield rises for the 2-year US government bonds, it indicates a lower risk appetite for stocks and cryptocurrencies, which have traditionally been followed by significant sell-offs for these two asset classes.
The same mechanism prevailed during the 2-year bonds’ recent rally. As you can see in the chart below, the yield for the 2-year US government bond has risen from 0.22% at the beginning of October, up to 1.65% in February. During this period, the price of Bitcoin fell from its all-time high of $69,000 to $33,000.
However, as you can also clearly see, the yield has hit a major resistance level recently, indicated by the horizontal yellow line in the chart. How likely it is for the 2-year bond yield to penetrate through such a major resistance, without having any pullbacks, is subject to debate. But, if the yield does indeed pullback, it could end the current downtrend in cryptocurrencies for the short-to-mid term, while also invalidating the H&S formation in the S&P 500 index chart.
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