Post-Inaugural Crypto Market Strategies

So I’ve been thinking about the crypto market lately and how it reacts post-U.S. presidential inaugurations. There’s definitely some interesting stuff to unpack here, especially when we look at how things have changed, and how they might continue to do so.

The Historical Context

Historically, these transitions have seen substantial shifts in the crypto market, especially when there’s a Republican in charge. I mean, after Obama and Trump’s inaugurations, Bitcoin surged by 7,000% and 2,000% respectively. That’s not small potatoes.

According to research from Bloomberg and Macrobond Financial, risky assets, including cryptocurrencies, tend to rally in the weeks following the presidential election, only to take a breather after the inauguration. This pattern seems especially pronounced with Republican victories, as noted by TS Lombard.

Scott Chronert, a strategist with Citi, is advising caution in light of a potential post-election rally. He suggests taking profits if the S&P 500 climbs above 6100 points, currently about 5% higher than where we stand now. But don’t worry; this lull is only temporary, and usually, the market recovers a few months after the new president is installed.

The Changing Landscape

But here’s the kicker: this time around, the traditional correlation between Bitcoin and the U.S. stock markets is weakening. Binance’s research shows that since March 2024, the 30-day rolling correlation coefficient between Bitcoin and Nasdaq has dropped down to 0.46, a five-year low.

Ethereum, however, is still playing nice with U.S. tech stocks, having a correlation around 0.66 according to MacroAxis.com. So maybe Bitcoin is maturing in a way that it’s not paying as much attention to U.S. politics as before.

Ryan Lee, chief analyst at Bitget Research, is predicting a 30% correction in Bitcoin before the new bullish cycle kicks in, which should take Bitcoin back to around 70,000 dollars.

What Does This Mean for Traders?

So what does this mean for us short-term traders? Well, we need to be nimble.

Risk Management is key. We should tighten our stop-losses and size our positions appropriately, especially with the volatility and risks that come with this evolving correlation.

Monitoring both crypto and traditional market indicators is crucial to anticipate spillover effects. The correlation means that there are significant spillovers between crypto and equity markets. Those will be especially pronounced during high volatility periods in the financial markets, like March 2020 or the FTX collapse.

Diversifying our portfolios may also be an option. Cryptos tied closely to traditional assets may not offer the same risk reduction.

Last but not least, liquidity management is paramount. Cryptos are known for their volatility, which can spike during high correlation periods with traditional markets. We should be prepared for quick price movements and potential liquidity issues.

Summary

In conclusion, the evolving correlations between cryptocurrencies and traditional markets suggest that short-term traders need to be more vigilant about risk management, monitor market interconnections closely, and adapt our strategies to the changing market dynamics. Staying informed and adaptable will be our best ally in navigating the crypto landscape amidst these political and market shifts.