Bitcoin's loss is the stock market's gain as investors rotate out of crypto and into equities, Vanda Research says

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  • The recent decline in bitcoin represents the early days of a crypto-to-equity rotation, according to Vanda Research.
  • Stocks and cryptocurrencies have been negatively correlated since March, according to Vanda.
  • “With momentum in cryptocurrencies stalling, we expect some of the money to slowly flow into equities again,” Vanda said.
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Bitcoin’s loss is the stock market’s gain as investors rotate out of cryptocurrencies and into equities, according to a note from Vanda Research.

The firm said it is “early days” in the rotation, which no doubt accelerated over the past week with bitcoin and ether both falling more than 30% in a single day.

“With momentum in cryptocurrencies stalling, we expect some of the money to slowly flow into equities again,” the note said.

That rotation has been on full display recently, with retail investors actively buying the dip in equities as cryptocurrencies sold off. Over the past week, bitcoin is down about 15%, whereas the S&P 500 is up about 1%.

Most equity purchases have been concentrated in equity index-ETFs, rather than single stock purchases, according to Vanda.

“We attribute this dynamic to the lack of clear opportunities in retail favorite stocks like EVs, hydrogen, cannabis and the ARKK complex, which is driving retail investors to purchase indexed funds instead,” the note explained.

The rotation into stocks and out of crypto has been slowly building since March, which is when both asset classes began to see negative correlation, according to Vanda, representing “a sign that retail money was flowing back and forth between them.”

The rotation back into stocks among retail investors could accelerate further if large cap technology stocks regain their footing and begin to rally. The sector is one of the worst performing groups of stocks year-to-date, far lagging the energy, financials, and materials sectors.

“Because a large part of their portfolio is tilted towards the [tech] sector, a rebound will help them to cover some of their recent losses and rebuild the capital buffer to take on riskier bets,” the note concluded.