Are choppy markets a risk to Bitcoin's cycle?

Last week, the S&P 500 in the United States rose to 5,767 points.

Last week, the S&P 500 in the United States rose to 5,767 points. That means the main leading index, which covers the 500 most valuable publicly traded companies in the country, hit a new record high. Shareholders on the exchanges can look forward to sizable gains. The S&P 500 and other markets have been in a two-year bull run since October 2022, sprinting from record to record. The crypto market situation, however, is a bit different. After a fairly subdued second half of the year for Bitcoin and altcoins, many investors are hoping for a strong year-end rally that could kick off a new bull market.

Based on the Bitcoin cycle, a market shift is expected

Bitcoin hodlers’ hope to realize strong profits soon is mainly based on the Bitcoin cycle. This four-year period is characterized by three key elements: the Bitcoin halving and a bull and a bear market. A look at Bitcoin history shows that every 'bull run' usually starts a few months after the mining rewards halving in the Bitcoin network.

The last halving took place on April 19, 2024. Assuming Bitcoin price action continues to follow cycle theory, the new bull market could start as early as Q4 this year. Investors therefore hope prices will rise in the coming months, as in the past, and that Bitcoin and altcoins will hit new records.

Predicting the market is impossible, but many investors cling to past patterns.

History shows a strong correlation between Bitcoin and stock prices

But this is where risk could lie. A look back also shows the crypto market’s strong dependence on stock market moves, especially in the U.S. The example of the S&P 500 makes clear that there is currently a unique confluence between stocks and crypto that could slow the bull run or, in the worst case, even derail it.

U.S. markets are outpacing Bitcoin

2024 is playing out very differently from previous Bitcoin cycles. In the past five months, the S&P 500 has risen much more than in the past after halving events. Bitcoin’s price has not benefited here and has tended to move sideways, with no clear correlation to the U.S. stock market.

The current stock market setup is significantly more bullish than in all previous Bitcoin cycles. This alone isn’t a reason for Bitcoin investors to worry. As long as the bull market on the exchanges continues, the crypto market could again build a strong correlation in the coming months. Bitcoin could then kick off the new bull market in the S&P 500’s wake, at its usual pace. Especially since, statistically, the six strongest stock market months typically start in November.

Three risks for a stock market crash

But what happens to the expected Bitcoin rally if U.S. stock markets suddenly run hot after many record months and there’s possibly a crash on the exchanges? There are several possible reasons that could support such a scenario in the stock markets in the coming months, in addition to technical indicators that may point to an overbought market in the near future:

The global economic and geopolitical situation remains an unpredictable risk. Financial markets are currently not at all impressed by the growing crisis in the Middle East and the war between Russia and Ukraine. But if the conflict areas spread to other countries and the threat scenario grows, this could sooner or later bring uncertainty to the stock markets.

A second risk is U.S. interest rate policy and inflation. Now that the rate-turnaround is behind us, the financial market is already pricing in further rate cuts, as shown by current projections. But what happens if the Fed doesn’t keep the pace or if inflation rises again and the Fed is forced to pause or even hike again?

The third risk factor is the upcoming American elections in November. While a Trump re-election, seen as pro-business, would likely give markets an extra push, the implications of a Kamala Harris win for the stock market are hard to gauge right now. Trump himself, in his usual hyperbolic style, predicts a disaster for stocks if Harris wins. “If Harris wins this election, the result will be an economic crash under Kamala. A depression like 1929. If I win the election, we’ll immediately see a brand-new economic boom under Trump. It’s going to be a boom,” the former president said during a campaign stop in North Carolina. Goldman Sachs economists, however, predict better times under Kamala’s leadership.

Bitcoin decoupling could save the rally

If U.S. stock markets end their bull run in the coming months or even slip into a correction for one of the reasons mentioned, that could have immediate effects on the Bitcoin market.

In a bearish scenario, the correlation with the stock market would be as strong as in previous cycles. At least, there’s a greater chance the bull market won’t unfold as strongly as after the halvings in 2012, 2016, and 2020.

In a bullish scenario, however, Bitcoin would manage to fully break its correlation with the U.S. stock market. If the crypto market can fully decouple from stocks for the first time in its history and rise against the trend, it could mark a new chapter and potentially strengthen Bitcoin as an investment category.