If crypto is to sustain its New Year rally, central banks need to pivot, research from CoinShares suggests. 

Interest rate sensitive assets are relying on a turnaround in monetary policy across the globe to sustain momentum, according to James Butterfill, head of research at CoinShares. 

Crypto and equities — which both have historically moved on macro indicators, like inflation prints and central bank rate decisions — are becoming increasingly correlated as investors contemplate the best asset allocation strategy. But central banks are due for a pivot, so the trend will not last forever, Butterfill said. 

“As monetary policy reverses in the second half of the year, it is likely that we see much greater support for digital assets by investors,” Butterfill wrote in the note. “It will also be the point at which the momentary higher correlation between risk assets such as equities and digital assets will degrade.” 

Bitcoin and ether have managed to stay in the green so far in 2023, rallying about 29% and 33%, respectively, since New Year’s Day. The S&P 500 and Nasdaq Composite indexes have similarly had a strong start to the year, posting around 4% and 7%, respectively, in 2023. 

“It makes sense that Bitcoin is an interest-rate-sensitive asset, due to its monetary properties, but this is different to equities, which are interest-rate sensitive due to the negative impact that rising rates have on corporate margins,” Butterfill said. 

With recession fears mounting, central banks are going to start to pivot and slow the pace of interest rate hikes, which Butterfill said will decouple crypto from stocks. Hawkish monetary policy throughout 2022 led to the worst bear market seen in years for cryptos and equities, he added. 

But, as inflation shows signs of easing and central bankers start to shift their priorities, it could set the stage for a strong year for cryptoassets. 

“Equities are likely to suffer from the poor economic outlook, while assets such as bitcoin will outperform off the back of poor central bank monetary policy and the prospect of lower interest rates,” Butterfill said.

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