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Understanding the Correlation Between the Stocks and Crypto Markets

Since Satoshi penned his blueprint on bitcoin’s whitepaper in 2009, the correlation between stocks and crypto has evolved steadily. The same goes for the relationship between crypto and bonds, commodities, or equities. This weak affiliation to traditional asset classes has made Bitcoin a lucrative asset for investors looking to diversify their portfolios

However, bitcoin’s correlation to stocks has been steadily rising in recent months, as the asset class sees increased adoption. More financial institutions and Wall Street giants embrace bitcoin, while companies such as PayPal and Visa have added support for the flagship crypto on their payment networks.  

Could the king coin’s entrance into the mainstream be possible by replacing the legacy financial system? Let us take a deep look at the correlation between commodities and crypto in recent years. 

Bitcoin’s Reputation as an Uncorrelated Asset

Bitcoin’s goal is to introduce a new counterculture in finance following the collapse of the banking system in 2008. Satoshi and the anarchist libertarians behind BTC set out to create a new deflationary form of digital money. Their invention should exclude the governments and financial institutions that had eroded public trust.

Over the past decade or so, bitcoin has served its purpose as a hedging instrument during times of economic downturn, leading crypto proponents to revere it as “digital gold.”

The world’s first cryptocurrency has a growing reputation as a safe haven in times of financial crisis. That stems from its fixed supply, which makes it resistant to inflation. The coin’s 100% decentralization means that central banks cannot manipulate its value.

A recent example of when BTC proved its status as an uncorrelated asset was in April and May of 2019. Then, the token scaled new heights as stocks struggled. The crypto logged a sharp bullish move, jumping  69%, while the S&P 500 dipped over 7%  during that period. 

More recently, in May 2021, trading boomed in the digital assets market. Meanwhile, volumes in equities and stocks slowed down as more institutional investors shifted their attention to crypto.

Activity picked up in crypto exchanges and derivatives, leading to volumes rocketing to $1.7 trillion in May, up from $100B the previous month.

In stark contrast, US equities tumbled 27%, demonstrating that crypto markets often move in the opposite direction to stock markets. Low correlation to stocks is crucial for crypto investors, as it gives them numerous portfolio diversification benefits.

Bitcoin’s Bond to Stocks over the Past Three Years

A report released earlier this year by VanEck confirmed BTC behaving as an uncorrelated asset. Additionally, it showed it moving in the opposite direction to bonds and indexes, such as the S&P 500 between 2013 and 2019. 

However, a closer look at the bond between BTC and the S&P 500 shows that correlation patterns are taking a different turn. The correlation between the world’s largest stock index and the world’s first crypto rose to an eight-year high in 2020.

The S&P 500 has seen several dips in the past three years, with the most notable one being a 31.7% crash in Feb-March of 2020. During this period, BTC behaved similarly, slumping by a whopping 51.6% in May during the historic Black Thursday Crash.

Interestingly, the forces tying BTC to stocks strengthened between 2018 and 2020. Also, the three biggest dips in the stock markets over that period coincided with major retracements in crypto markets. 

Data from VanEck confirms that bitcoin’s correlation to the S&P 500 moved back and forth over the past three years. The coin had a positive correlation in 2018 with a coefficient of 0.04. It then became negatively correlated to the leading index in 2019. At that time, it had a coefficient of -0.09 before finally moving in the same direction as stocks in 2020.

Many tout Bitcoin as uncorrelated with most traditional investments. However, BTC has moved in the same direction as the Nasdaq and S&P 500 over the past three years.

Nevertheless, the correlation to stocks between 2018 and 2020 is still relatively weak. Even more so, when you compare it to Bitcoin’s relationship with gold, a rival safe-haven asset.

BTC Price Correlation with Stocks in 2021

The correlation between BTC and stock markets has been on a downtick since the turn of the New Year. Even more, BTC experienced a strong uptrend taking it to fresh new highs in April.

In that period, the stock market also recovered as the global economy bounced back from the Covid-19 induced lockdowns. However, BTC roared upwards at a much higher rate, doubling in value while the S&P 500 index jumped only 8.5%. 

The two markets are starting to move out of sync. This pleases even the most resilient BTC hodlers. As always, they are adamant that Bitcoin will eventually break its correlation with stocks and tread its own independent path.

The decoupling seen in recent months shows that the BTC market is maturing. Also, it seems less under the influence of the macroeconomic factors that adversely affect traditional stocks.

Crypto proponents firmly believe that bitcoin’s ebbing correlation with stocks in the past few months is proof that the asset has the potential to establish itself as a haven asset. 

Bitcoin Can Affect the Stock Markets

BTC has been gradually decoupled from stocks in recent times. Even more, the correlation dropped below zero in March 2021 for the first time since January of last year.

Per a recent report by DBS, a Singapore-based bank, bitcoin is coming out of the fringes of global finance and can have a significant knock-on effect on commodities. The study examined the shifting relationship between crypto and other assets. Its conclusion is that the average correlation will remain as low as 0.20.

The waning link with stocks in 2021 indicates that BTC is gearing up to become more like digital gold. That transforms it into more than just another investment instrument within the conventional fiscal system.

Final Thoughts on the Link between Stocks and Crypto

Stocks and gold have been on relatively bullish markets since the May 2020 global economic crash. However, BTC has managed to outperform both asset classes as the coin continues to gain appeal among high-profile investors. 

The behemoths of Wall Street continue to influence the crypto market and deter the asset class from decoupling from stocks. Still, evidence from the past few months shows that digital assets are breaking away from the traditional finance system.

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Bitcoin looks well primed to establish itself as digital gold. Macroeconomic factors like unemployment and hyperinflation should not affect it as much as it impacts the stock market. Therefore, it should become a viable alternative to regular stocks investors.

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