Bitcoin, S&P 500.... “Overly” valued markets?

Over the last quarter of 2023, the S&P 500 increased by almost 12%. The price of bitcoin (BTC) also rose by more than 60% over the same period. So this classic “end of year rally” added to the prospect of the American elections and monetary policy, in general a very positive signal on the markets. While the breezes of Europhoria are felt, some analysts are wondering about potential excesses in the financial markets. Deciphering the upside potential.

Bitcoin (BTC) soars faster than indices

The correlation of the price of bitcoin (BTC) with that of stock indices is a major indicator. Indeed, a lasting bull market in bitcoin begins with a strong correlation to stock indices. This correlation reduces to negative or zero when bitcoin (BTC) peaks.

Thus the correlation between bitcoin and the indices is generally minimal, or even negative, in the presence of major bitcoin peaks. »

Bitcoin remains correlated to indices –

Correlation matrix for the period June 2023 – December 2023. Assets (from left to right): Bitcoin, MSCI World, Ethereum, Gold, S&P500.

At the end of December 2023, the correlation between bitcoin (BTC) and the S&P 500 over the last 6 months is close to +56%. In addition, this correlation is weaker than that observed in June 2023 (+70%). This observation implies two important conclusions:

  • On the one hand, this tells us that bitcoin’s rise is somehow more “disconnected” other markets.
  • On the other hand, such a level of correlation (50%) has generally accompanied, or shortly preceded, a bullish runaway. However, if bitcoin were to rise in a manner uncorrelated with the markets, this could constitute a bearish signal.

An “excessive” rise in the markets?

The biggest mistake a prudent investor can make is to expose themselves to the markets irrationally. In other words, the risk is buying too expensive with the door open to significant losses. At the end of 2023, the essential valuation ratios of the S&P 500 show several interesting elements:

  • The P/E ratio of the S&P 500 (price/earnings) is 26, which is 10 points higher than the historical average. If this level is somewhat ” pupil “ and calls for caution, it is not abnormal in the context of the previous decade. Likewise, the PER of the CAC 40 is 24.5, which is historically (very) high.
  • The S&P 500’s earnings yield is close to 3.8%. Which corresponds to the 10-year rate of the American government. A rise in the S&P 500 is only possible with a fall in rates. However, the S&P 500 dividend is less than 1.5%, which is historically very low.
Dividend yield for the S&P 500. Source: S&P 500 Earnings Yield Charts, Data (

This significant revaluation of assets at the end of 2023 is also explained by unmanifested risks. In 2022, Bloomberg announced that a recession would occur in 2023. But that did not happen… The economy remained robust, and the markets seem to have corrected a persistent concern about rates (a recession would have limited the rise in rates). Despite everything, the gap between long rates and short rates tells us that investors perceive even more risk in the short term. The probability of a recession is not negligible, but it could occur in 2025 (or 2026), or later.

Difference between long rates (10 years) and short rates (2 years). Source : 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y) | FRED | St. Louis Fed (

Central banks will have the last word

We saw that the valuation ratios of stock indices were high. However, stock market indices are based on the assumption that rates will decline in the long term. Thus, the money supply could resume its growth rate. The graph below clearly illustrates this hypothesis. In January 2022, the financial markets reacted in anticipation to the rise in rates, leading to a significant fall in the S&P 500. In this context, the rebound observed at the end of 2023 on the S&P 500 thus erased a (too) significant correction.

M2 money supply for the United States and S&P 500. Source: M2 (M2SL) | FRED | St. Louis Fed (

The end of 2023 seems to indicate that the S&P 500 is valued slightly above its monetary trajectory. As a result, financial markets are betting on a stabilization or reduction in rates from 2024 (increase in demand for credit). This trend will be confirmed during 2024. But it is also clear from this chart that the upside potential seems more limited than in 2021. This observation could also be applied to the price of bitcoin (BTC).

The criteria monitored by the FED will be the level of inflation and the unemployment rate. The unemployment rate has remained below 1.8% since March 2022. An unemployment rate that rose above 2% would indicate a good probability of witnessing a slowdown in the economy, or even a recession. For its part, the inflation rate (year-on-year) has stagnated between +3% and +3.7% since June 2023. Maintaining inflation at this level would lead to stagnation and then a slight drop in rates. Otherwise, a further reduction in inflation would result in a very positive outlook for all markets.

What potential objectives?

As an intangible rule, the volatility of bitcoin reduces in the long term. That is to say that the amplitude of variations of bitcoin is less. Nonetheless, it is notable that most bull markets are accompanied by increased volatility. At the end of 2023, bitcoin volatility is close to 36%, compared to an average of 50% since 2020. Furthermore, it is remarkable that extreme upward variations (with a theoretical probability of 1% of occurring) have occurred. in October 2023. Indeed, we observed a daily variation of more than 12%, which is generally a positive signal (which has not occurred since the end of 2022).

Annualized volatility of bitcoin (BTC).

By considering both the volatility of the bitcoin (BTC) price and the price’s deviation from the historical norm, we can outline an upside potential. Indeed, it is quite disturbing to see that the average of the variations observed in bitcoin since 2020 would, in the most favorable scenario, allow the price of bitcoin to multiply at the end of 2023 by 2.6 ($43,000 x 2.6) . Which is close to the Fibonacci extensions in technical analysis (2.618). An increase in the price of bitcoin beyond this threshold would have a probability of less than 5% of occurring.

Bitcoin price (BTC), moving average centered at

Key levels

However, using normal bitcoin statistics requires great caution, as the divergence from reality is often considerable. The proposed approach, however, makes it possible to visualize statistically possible levels. Additionally, the bitcoin price remains close to its 200-period long moving average. Therefore, this means that a bullish move would have enough momentum to flourish, up to $20,000 beyond this average.

This approach makes it possible to affirm, in the case of a favorable scenario, that the first objective would be close to $50,000 (then the last historic peak by extension). Then, if a particularly intense upward trend manifests itself during a year, then there are some probabilities (admittedly minimal from the point of view of normal statistics) of reaching the zone of $100,000 // $110,000. In the opposite case, we will retain the last low points ($16,000 // $20,000) as major support.

Finally, an approach by Fibonacci retracement of the entire bearish movement of 2022 allows us to conclude the importance (downward) of the following thresholds: $27,000, $32,000, $41,500, $48,000.

In conclusion

Finally, we showed that the price of bitcoin (BTC) had a more independent trajectory. Indeed, the correlation of bitcoin to the S&P 500 is reducing. This is a key feature of bitcoin bull markets. This rise in bitcoin may then seem more difficult to understand in a particularly bullish end-of-year environment.

Stock indices in general show already high valuation ratios. Financial markets are based on the hypothesis (already included in prices) that the money supply should gradually resume its growth rate. Without this, downward pressure could emerge in early 2024. Liquidity is an essential issue for all markets, in particular for cryptocurrencies. This favorable scenario will only be validated if unemployment does not fall and if inflation remains stable or reduces.

In the case of bitcoin, price volatility has reduced in recent months. This phenomenon is entirely in line with the upward recovery dynamic. A statistical approach allows us to better understand potential changes in the price of bitcoin. In particular, Fibonacci extensions seem relevant to follow.

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