Is Bitcoin Booming or Stalling?

Key considerations:

• Analysts downgraded U.S. stocks on high valuations, a weaker dollar and policy risks despite AI-driven earnings growth.

• A limited rise in the S&P 500 could drive capital into Bitcoin, especially if large sovereign funds announce BTC holdings.

Bitcoin (BTC) price dropped below $65,500 on Friday, effectively erasing Wednesday’s gains. The correction followed the S&P 500’s intraday moves after U.S. wholesale inflation data led to an increase in risks. A report by investment bank UBS, which downgraded US stocks to neutral, is likely to accelerate demand for the safety of fixed income assets.

Investors fear that a potential doomsday scenario for the US stock market could push Bitcoin to new annual lows. While rising costs for artificial intelligence infrastructure remain a primary concern for some, Bitcoin’s long-term trajectory is unlikely to depend on the tech sector.

Institutional adoption of Bitcoin can improve market sentiment

According to UBS’s global equity strategy group, valuations in the US stock market are no longer attractive compared to other global regions. Analysts have pointed to growing risks from a weakening dollar and US policy turmoil, creating risks of an asymmetric structural downturn. In addition, corporate purchasing appears to be losing its effectiveness in maintaining price levels.

The importance of the $70 trillion market cap cannot be overstated, even though it disrupts price trends in supposedly correlated assets like Bitcoin. However, the UBS report is far from a doomsday prediction, especially considering their year-end S&P 500 target remains at 7,500.

Part of the recent decline to $65,500 is explained by the fact that the US producer price index rose 0.5% in January compared to the previous month. When inflation measures start to surprise, traders are often unsure about the US Federal Reserve’s interest rate cut. Restrictive monetary policy has a negative impact on the economy because credit remains expensive and companies have less incentive to expand production.

US Treasury yields serve as a proxy for assessing investor risk. In times of uncertainty, traders seek refuge in government bonds regardless of current inflation trends. The extraordinary decline in the 10-year US Treasury yield from 4.21% to 3.97% just three weeks ago indicates a shift in risk sentiment. This is particularly notable as the S&P 500 has shown signs of weakness despite a positive surprise in corporate earnings.

UBS’s global equity strategy report says U.S. stocks are trading 35% above global peers, compared with an average premium of 4% since 2010. Analysts cited volatility in US policy proposals to cap credit card interest rates, impose additional tariffs on imports and impose potential restrictions on private equity investment in housing. However, the bank expects AI adoption in the US to help sustain revenue growth in key industries, according to CNBC.

If the rise in the S&P 500 is limited, Bitcoin could benefit from the final capital outflow, as gold, the absolute store of value, has already reached $36.5 trillion in market capitalization. To put that in perspective, the 10 largest tech companies have a combined market capitalization of $24.2 trillion. Even if the price of Bitcoin increases by 52% to $100,000, its market cap will be $2 trillion. Thus, unless the fixed income or real estate markets benefit from the potential capital outflows, Bitcoin remains a valid candidate.

related to: Spot Bitcoin ETFs take in $1 billion in three days as investors buy the dip

Sentiment towards Bitcoin can change positively as soon as new major companies or independent funds announce strategic holdings of BTC, even if organized through the exposure of an exchange-traded fund (ETF). There is no way to predict these events, but history has proven how the risk perception of traders can change positively when a company like Tesla (TSLA USA) announces a relevant position in Bitcoin. But until then, the likelihood of onchain breaking away from the US stock market remains low.