Bitcoin and S&P 500: Are Crypto and Stock Markets Still Unrelated?

by

BTC as source of diversification

As a crypto investor with several years of experience under my belt, I have learned that the world of digital currencies offers unique opportunities for diversification. Bitcoin, in particular, has historically shown low correlations with traditional asset classes, making it an attractive addition to portfolios seeking idiosyncratic risk and potential enhanced returns.

As a financial analyst, I’ve observed that cryptocurrencies have shown minimal historical relationships with conventional investment assets, making them an intriguing addition to diversified portfolios due to their distinct risk factors.

Bitcoin’s value is renowned for its drastic fluctuations, akin to a thrilling roller-coaster ride. In 2022, it experienced a steep drop of over 64%, only to surge by approximately 160% in the following year (2023). This unpredictability poses a significant challenge for cryptocurrency traders.

Instead of “On the other hand,” you could use “Alternatively” or “In contrast.”

Investing in cryptocurrencies can help reduce risk and boost the performance of conventional investment portfolios, based on Glassnode’s analysis.

One way to rephrase this: Adding allocations of approximately 5% each to the Coinbase Core Index, which holds Bitcoin (70.9%) and Ether (21.9%), into a diversified investment portfolio comprised of 60% MSCI All Country World Index (ACWI) and 40% U.S. Aggregate Bond Fund, resulted in enhanced absolute and risk-adjusted returns over the five-year period from March 31, 2019, to March 31, 2024.

Strong Q1 performance

In the opening three months of 2024, the aggregated value of all cryptocurrencies, encompassing Bitcoin (BTC), Ethereum (ETH), altcoins, and stablecoins, experienced a significant surge, escalating by approximately 63%. This upswing was primarily fueled by remarkable price growth in principal cryptocurrencies such as BTC and ETH. Additionally, the issuance of stablecoins saw a noticeable increase during this period.

Bitcoin and S&P 500: Are Crypto and Stock Markets Still Unrelated?

In the opening three months of 2024, Bitcoin (BTC) demonstrated remarkable growth, recording a noteworthy increase of 69%, surpassing the expectations of many traditional investment classes based on data from Coinbase and Glassnode’s joint analysis.

Despite the introduction of Bitcoin (BTC) exchange-traded funds (ETFs), which some anticipated would result in a tighter link between BTC and traditional finance assets, recent reports from Glassnode and Coinbase Institutional indicate a weak correlation between BTC and significant asset classes. This discovery highlights its potential worth as a diverse investment option within a portfolio.

Bitcoin and S&P 500: Are Crypto and Stock Markets Still Unrelated?

BTC/S&P 500 correlation remains low

As an analyst, I’ve observed that Bitcoin exhibits a negative correlation with both the DXY index and gold. In simpler terms, when the value of the DXY index or gold increases, the price of Bitcoin tends to decrease, and vice versa. Conversely, the correlation between Bitcoin and the S&P 500 is relatively low at 0.11. This implies that Bitcoin’s price fluctuations are primarily driven by unique factors distinct from the broader traditional markets represented by the S&P 500.

As I analyze the market trends at the beginning of Q2, I notice that Bitcoin (BTC) has dropped by approximately 15% from its previous peaks. This downturn comes as the DXY index surpasses the 106 mark. The growing strength of the DXY index, which measures the value of the US dollar against a basket of six major currencies, underscores the inverse relationship between BTC and the US dollar.

The Q2 analysis indicated that Bitcoin’s volatility has diminished since early 2020, resulting in less extreme price peaks. Presently, volatility hovers around 60%, but the report underscores a persistent decrease over the long term, accompanied by occasional rises above the trendline, primarily happening in 2020 and 2021.

As Bitcoins evolves into a significant financial asset, its price instability is predicted to lessen progressively over the years.

Why stock market matters

Historically, Bitcoin’s relationship with the stock market has shown little connection. However, in more recent times, this correlation has started to pick up somewhat. Over the past five years, the correlation coefficient between Bitcoin and the stock market has risen to a level of 0.41.

Based on Tastylive’s findings, I have observed that Bitcoin and the S&P 500 exhibit limited correlation most of the time. However, this relationship becomes more pronounced during substantial price changes in Bitcoin, specifically when it experiences gains of over 5%, or losses of less than 5%.

When Bitcoin’s price movement exceeds 5%:

  • Average change of the S&P 500: 0.42%.
  • Median change of S&P 500: 0.19%.
  • Standard deviation: 1.53%.

When Bitcoin’s price movement is below -5%:

  • Average change of the S&P 500: -0.67%.
  • Median change of S&P 500: -0.34%.
  • Standard deviation: 2.31%.

On other days:

  • Average change of the S&P 500: 0.09%.
  • Median change of S&P 500: 0.11%.
  • Standard deviation: 1.11%.

The relationship between Bitcoin and the S&P 500 becoming more interconnected can be explained by several factors, including decreasing inflation rates and the U.S. Federal Reserve’s choice to halt interest rate increases.

As a researcher studying financial markets, I’ve observed that recent developments have fostered conditions conducive to optimistic trading strategies. Consequently, I’ve noticed bull rallies emerging for both Bitcoin and the S&P 500 index, surprisingly resilient against the bearish mood lingering in the aftermath of the 2022 correction.

Bitcoin and S&P 500: Are Crypto and Stock Markets Still Unrelated?

With Bitcoin‘s growing connection to conventional stock markets, such as the S&P 500 and Nasdaq, and its weakening link to gold, this pattern implies that Bitcoin is starting to function more like a risk-on investment instead of a secure haven asset.

When investors seek thrilling opportunities, they tend to be drawn towards stocks and cryptocurrencies due to their prospective high returns.

As more institutional and retail investors enter the stock and cryptocurrency markets, there is a heightened possibility for coordinated buying and selling actions. This convergence could result in synchronous price fluctuations for these assets.

Read More

2024-05-12 09:23