The US stock market is heating up in a way that suggests speculative mania. That means something for bitcoin, as analysts have linked the cryptocurrency’s recent rally to increased risk-taking on Wall Street.
The overheating signals come from options tied to the S&P 500. These are derivative contracts that let traders bet on or hedge against movements in the index. A call option is a bet that the index will rise above a certain price within a set time. A put option does the opposite and provides protection against a decline in the index.
On Wednesday, U.S. equity derivatives exchanges recorded $2.6 trillion in notional volume in S&P 500 call options, according to data tracked by Zero Hedge. That equaled 60% of total S&P 500 options activity. To put that in context, the nominal amount was almost equal to the total valuation of the crypto market at $2.73 trillion, which represents the combined capitalization of thousands of cryptocurrencies, with bitcoin leading the way.
Essentially, the majority of market participants were positioned to the upside through calls or bullish exposure.
On the surface, the implication for bitcoin is straightforward: it is bullish. A speculative rise in the S&P 500 could spill over into crypto and drive valuations higher. After all, double-digit gains in the S&P 500 and Nasdaq since early April have played a big role in lifting bitcoin to $80,000 from below $70,000 a few weeks ago.
QCP Capital put it best early this week when BTC broke above $80,000: “After a solid April, BTC has started May on a solid footing, breaking above $80,000 for the first time since January 31. The move appears to be in line with equities, reinforcing a broader trend as BTC’s correlation with US equities rises,20 signaling a 202 rally with risk assets broadly.”
That said, the outsized investor bias for bullish exposure in the S&P 500 has raised alarm on social media, with several handles calling it a sign of a crowded trade. When too many investors lean in the same direction, in this case heavily bullish, it leaves the market more vulnerable to sharp turns in sentiment and positioning if price momentum stalls.
It’s not just social talk either. Media reports have also quoted Goldman Sachs analysts describing the market as being in a “semi-irrational chase mode,” a phrase widely read as a play on the semiconductor-fueled rise in stocks.
If that’s not enough, the bullish momentum in the Nasdaq-listed PHLX Semiconductor Sector Index (SOX), as measured by the 14-week relative strength index, is the strongest since 1999, according to data source TradingView.
All this suggests speculative madness. If it unwinds just as quickly, downside volatility could spill over into bitcoin and the broader crypto market, given their positive correlation. Let’s see how things develop…
