Bitcoin Has Stumbled. That’s Not a Good Sign for Stocks.

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Bitcoin’s drop isn’t much of a surprise. Interest rates have risen in the past few weeks as markets worry that the Federal Reserve would keep lifting rates to combat high inflation. Risk assets like stocks and cryptocurrencies had rallied in the summer precisely because Wall Street had hoped that the Fed would slow down its rate hikes as inflation cooled. But with rates now not far below their multiyear highs, Bitcoin is facing pressure. When risk-free assets like government bonds offer a higher rate of return, it makes buying riskier assets less appealing. 

Bitcoin, unlike the stock market, is near a danger zone. At just over $21,000, it’s hovering just above key support around $19,000, where buyers have previously stepped in to send the price higher. A move below that price could open the door to more losses ahead with buyers absent. Bitcoin is “dangerously close to resuming the long-term downtrend,” wrote John Kolovos, chief technical strategist at Macro Risk Advisors. 

That presents a problem for stocks. Risk assets usually trade in the same direction over time, so with Bitcoin and stocks recently detaching from each other, something has to give. “Bitcoin looks terrible. Not a good look for ‘Risk,’” Kolovos wrote. 

To be sure, it could be that Bitcoin is ready to rally. Maybe Bitcoin has to catch up to the stock market’s rally. Sit tight.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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