One of the biggest problems with Bitcoin is stocks.

“Since November, cryptocurrencies have been increasingly correlated to the Nasdaq and S&P 500, ” wrote Marion Laboure, a Harvard University lecturer and senior economist at Deutsche Bank, in a report on Wednesday. 

And stocks are in a bear market. But understanding the relationship between digital assets and equities reveals some optimism amid a looming “crypto winter”—and Laboure sees what could be a 40% rally for Bitcoin prices ahead.

The S&P 500 and Nasdaq have plunged around 20% and 30% this year, respectively. The macro picture is largely to blame—with investors selling amid fears that the Federal Reserve’s plan to continue hiking interest rates to fight multidecade high inflation could spur a recession.

More of the same could be coming, Laboure wrote in the Deutsche Bank report. The Fed has many more rate hikes to go, while the central bank’s counterpart in the European Union has yet to begin raising rates. The Bank of Japan, too, is facing intense market pressures that have added turmoil to bonds.

“These macroeconomic factors are amplified by a potential recession in the U.S. and investor pessimism. Both are especially harmful to speculative assets,” wrote Laboure. “Additional macroeconomic shock could test the recent lows of cryptocurrencies and reignite contagion risks in the DeFi ecosystem.”

This complex context makes it hard to pinpoint where Bitcoin—a highly speculative bet that has benefited from loose monetary conditions and a lot of liquidity in recent years—will land. 

Ultimately, “the value of a Bitcoin will continue to rise and fall depending on what people believe it is worth,” wrote Laboure.

There are other rational factors that influence the price of Bitcoin, the economist noted, including limited supply, growing institutional demand, concentrated holdings, and a lack of common trading standards.

While it can be tough to put a value on Bitcoin, the connection between its price swings and action in the stock market may shine a light on how cryptos will perform amid the complex macroeconomic environment ahead.

“Despite rising yields during the Fed’s tightening cycles, equities ended up posting nominal gains in twelve out of thirteen previous times that the Fed put the brakes on the economy,” wrote Laboure. “Cryptocurrencies might be undergoing a similar process today.”

Deutsche bank sees the S&P 500 hitting 4,750 points by the end of the year, up from around 3,800 on Thursday. Using that as a baseline, Laboure estimates that Bitcoin could finish 2022 at a price of approximately $27,000.

A move of that magnitude might seem like a deliverance to investors—a 40%-plus rally from current prices—but it would still bring Bitcoin to less than half its all-time high and a level at which many holders remain underwater.

“Bitcoin’s performance during this tightening cycle will be a key test for its ability to be regarded as a separate asset class,” Laboure wrote.

Write to Jack Denton at jack.dentondowjones.com