- The risk-on nature of bitcoin means the cryptocurrency is a great tool for investors to identify a bottom in the stock market, according to Stifel.
- Stifel said tighter financial conditions could send bitcoin sharply lower to about $15,000.
- "We think Bitcoin is late to the capitulation in risk, and a wash-out we see coming for bitcoin helps time an equity low," Stifel said.
The speculative nature of bitcoin and its risk-on characteristics means it's a great tool for investors to identify a bottom in the stock market, Stifel's Barry Bannister said in a note last week.
Bitcoin has been highly correlated to technology stocks in 2022, rising and falling in line with stocks as investors grapple with a tightening Federal Reserve and rising inflation.
"We think bitcoin is late to the capitulation in risk, and a wash-out we see coming for bitcoin helps time an equity low," Bannister said.
He expects bitcoin to break well below $30,000 and fall an additional $10,000 to $15,000. That would put bitcoin at between $15,000 and $20,000, which is about where the cryptocurrency topped out in late 2017.
That points to more downside ahead for the stock market, but even more for bitcoin, given bitcoin's highly speculative nature and its lack of underlying earnings and cashflow that stocks can fall back on during periods of stress.
"Equities thrive on excess liquidity, and sinking global M2 money supply weighs on the S&P 500, but more so for bitcoin. Tighter financial conditions should sharply weaken bitcoin as well," Bannister explained.
The equity strategist also highlighted bitcoin's sensitivity to GDP, given its propensity to fall when the PMI manufacturing index drops, "indicating that a last, capitulatory bitcoin drop may be still ahead," as Stifel expects the PMI to fall again in the third quarter of 2022.
Since Bannister's note, bitcoin has traded below the $30,000 level, and technical analyst Katie Stockton sees potential for the cryptocurrency to test the $18,000 level if support at $27,200 fails to hold.
While he sees a lot more downside for bitcoin, he only expects a little more downside for stocks, estimating that the S&P 500 will fall only 5% more to just below the 4,000 level. But when bitcoin does find its ultimate bottom, that will probably mark a great time to buy stocks, according to Bannister.