The first quarter of 2025 has been defined by a rise in growth fears and inflation expectations leading to hightened stagflationary risks. The culprit is of course Trump’s tariffs policy.
Bitcoin has been often cited as a hedge against inflation but the actual drivers of the cryptocurrency show a different perspective. Bitcoin is just another risk asset like stocks and it’s not a coincidence that it’s been selling off alongside the stock market.
The main driver of the stock market is growth expectations. If you have positive growth expectations, you can also expect higher earnings in the future which is what a stock price reflects. These growth expectations are also reflected in the credit spreads. Credit spreads refer to the difference in yields between corporate bonds
and risk-free U.S. Treasuries of the same maturity. They reflect the
additional risk investors demand for holding corporate debt.
S&P 500 (blue) vs Credit Spreads (red)
A
widening spread means corporate bond yields are rising relative to
Treasuries, signaling that investors see greater default risk. This often happens when economic uncertainty grows, making it more expensive for companies to borrow. It can indicate a slowdown, weaker corporate profits, and potential recession risks. If credit spreads narrow, it suggests improving economic confidence, as investors demand less premium for riskier debt.
Bitcoin has been much more correlated with the stock market and credit spreads rather than gold. Of course, correlations are not perfect and sometimes we can have short term divergences or changes in magnitude because of idiosyncratic drivers, but in the bigger picture they help a trader know what actually moves the asset. If you don’t know what moves your asset, you will have a hard time trading it.
Bitcoin (blue) vs. Credit Spreads (red)
If we take the S&P 500 chart against bitcoin’s one below, we can see the correlation. As mentioned above, it’s not perfectly tight because of idiosyncratic drivers like the one keeping bitcoin down in the summer of 2024 because of the German government selling and Mt Gox repayments. In the bigger picture though, it shows that growth expectations and risk sentiment are the main drivers.
S&P 500 (blue) vs. Bitcoin (red)
Speaking of gold. The precious metal is up more than 18% just in the first quarter, while bitcoin is down 12%. Clearly something doesn’t add up. There were short term periods when both of them were correlated but it was more of a coincidence. In fact, gold is mainly driven by real yields. When they rise, gold falls and when they fall, gold rises.
As you can see in the chart below, gold and real yields have had a very tight correlation. Since 2022, many have been saying that the correlation has broken down. It’s a half truth. The correlation is still there, it’s the magnitude that changed. Now gold rises much more when real yields fall, and falls much less when real yields rise. Again, there are idiosyncratic drivers at play.
Gold (red) vs Real Yields (blue – inverted)
Generally, real yields fall when markets expect better growth ahead with the central bank cutting rates. This generally sees inflation expectations rising faster than nominal yields. It’s a good environment for gold and risk assets.
Right now though, we have inflation expectations rising while growth forecasts get revised lower. This is stagflationary expectations. This is when real yields fall in a bad environment. Gold rises but risk assets fall.
Gold (red) vs Real Yields (blue – inverted)
In the chart above, we can see that in the last year, gold has been rising steadily and had periods of underperformance when real yields rose like in May-July and October-December.
