Key Takeaways

Bitcoin prices ( BTCUSD ) dropped to $56,000 Wednesday morning amid a broader stock sell-off led by declines in market heavyweight Nvidia ( NVDA ) before clawing back some of those losses later in the day.

Investors are not just getting nervous about the cryptocurrency; bitcoin exchange-traded funds also saw $287.8 million in outflows on Tuesday, the fifth straight day of net outflows in a row, according to Farside Investors.

Why Are Stocks Causing a Bitcoin Sell-Off?

The most recent bitcoin price drop also correlates with sell-offs in the Nasdaq and S&P 500 , which has made some question the crypto asset's effectiveness as a hedge.

According to data from The Block , bitcoin has moved more in tandem with the traditional stock market than gold lately, despite its touted use case as a safe-haven asset.

Bitcoin's Pearson correlation with the Nasdaq went as high as 0.9 in June (on a scale from 0 to 1) and came into the spotlight amid the equities sell-off roughly one month ago .

Although Bitcoin's correlation with stocks has reduced slightly since then, it remained above 0.5 as of last week, while the crypto asset's correlation with gold became slightly inverted.

What's Next For Bitcoin?

Approval of spot bitcoin ETFs and optimism around the bitcoin halving that took place earlier this year drove bitcoin's price to a new high of over $73,000 in March. But the Federal Reserve could play a bigger role in how Bitcoin heads next.

As the Fed raised rates to combat inflation, yields on U.S. Treasurys rose and became more attractive to investors than riskier assets such as stocks and bitcoin. A rate cut could benefit those assets as yields come down.

However, analysts from crypto exchange Bitfinex predict more pain for bitcoin with a potential 15% to 20% bitcoin sell-off in the cards following a rate cut from the Federal Reserve later this month.

"Since early August, Bitcoin has gained over 32%, driven by traders anticipating dovish comments by the Federal Reserve," the Bitfinex analysts wrote in their report. "A more aggressive 50 basis point cut might cause an immediate price spike but could be followed by a correction as recession concerns escalate."

Bitcoin was trading above $58,000 in recent trading.

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