Exploring the link between Bitcoin and Indices - What is it teaching investors?
Not only is Bitcoin (BTC) an incredibly volatile entity, but it’s also continuing to evolve both in terms of its price and correlation with other assets.
Author:Frazer PughReviewer:Emmanuella SheaSep 06, 202164.9K Shares1.1M Views
Not only is Bitcoin (BTC) an incredibly volatile entity, but it’s also continuing to evolve both in terms of its price and correlation with other assets.
Historically, for example, BTC’s correlation to traditional asset classes has been noticeably low, but it’s interesting to note that this trend has begun to shift of late. In fact, the correlation between these two asset classes peaked in 2020, thanks to a number of different factors including increased adoption rates (we’ll touch on this further below).
But just how prevalent is this correlation today, and what does it teach investors and traders from across the globe?
Exploring The Correlation Between Bitcoin And Stocks
Bitcoin is often referred to as ‘digital gold’, thanks to factors such as its finite supply and its status as a relative safe-haven asset that’s largely invulnerable to traditional macroeconomic factors.
Interestingly, this trend has actually been in focus since 2018, when BTC began to demonstrate a growing correlation with the world’s largest stock index before this reached an eight-year peak last year.
But what did this correlation look like? Between 2018 and 2020, BTC mirrored the peaks and troughs of S&P 500, with the latter experiencing three dips of at least 10% or moreduring this period.
The only difference was that BTC tended to record more severe and exaggerated peaks and troughs, thanks to its inherently volatile nature and fundamental lack of tangible value.
Some experts have argued that the peak in 2020 will have been exacerbated by the coronavirus pandemic, and we’ll explore this assertion in a little more detail in the next section.
However, the fact remains that BTC’s correlation with the stock market began to decline towards the end of 2020, before falling below 0.2 at the start of the new year.
So, while both BTC and the S&P 500 have embarked on a strong upward trend through 2021 to date, the former has doubled in value during this time while the latter has only grown by roughly 8.5%.
The Impact Of Covid-19
Logic tells us that cryptocurrencies should move inversely to traditional assets in times of crisis, as they’re not managed by a central authority and therefore cannot be manipulated as part of wider quantitative easing measures.
This also makes crypto assets largely immune to macroeconomic shifts and changes, establishing market leading tokens like BTC relative safe havens that would have attracted investors during the pandemic.
However, there’s ample evidence that Bitcoin has become an increasingly mainstream assetin recent times, and despite its innate volatility, it has seen its value grow more than four-fold during the last 18 months.
Thanks to the combination of rising value and increased adoption rates (especially in the financial services sector), Bitcoin and similar assets have become more closely correlated with traditional stocksand particularly during periods of economic crisis.
The Last Word
This is part of a wider trend, of course, with BTC, stocks and gold having all enjoyed strong correlation in recent times and particularly through 2020.
This has much to do with increased personal and institutional demand in BTC than anything else, as the inflow of corporate funds into the crypto spacecontinues to increase incrementally.
Similarly, we’re also seeing a shift in the make-up of retail traders, many of whom are younger, more digitally savvy and increasingly likely to bridge the gap between BTC and traditional assets.
Frazer Pugh
Author
Frazer Pugh is a distinguished expert in finance and business, boasting over 6 years of experience. Holding an MBA in Finance from Stanford University, Frazer's credentials underscore his authority and expertise in the field.
With a successful track record in executive roles and as a published author of influential articles on financial strategy, his insights are both deep and practical.
Beyond his professional life, Frazer is an avid traveler and culinary enthusiast, drawing inspiration from diverse cultures and cuisines.
His commitment in delivering trustworthy analysis and actionable advice reflects his dedication to shaping the world of finance and business, making a significant impact through his work.
Emmanuella Shea
Reviewer
Emmanuella Shea is a distinguished finance and economics expert with over a decade of experience. She holds a Master's degree in Finance and Economics from Harvard University, specializing in financial analysis, investment management, and economic forecasting.
Her authoritative insights and trustworthy advice have made her a highly sought-after advisor in the business world.
Outside of her professional life, she enjoys exploring diverse cuisines, reading non-fiction literature, and embarking on invigorating hikes.
Her passion for insightful analysis and reliable guidance is matched by her dedication to continuous learning and personal growth.
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