Bitcoin’s correlation with gold and stocks is growing
A year ago, you wouldn’t have thought that Bitcoin would even be able to enter the mainstream. But since its explosive price hike, it has been drawing more and more attention. Why? After all, Bitcoin isn’t exactly new. It has been around since 2009 and has been all over the news since then, popping up in headlines from newspapers to online magazines.
Whether it’s a strong bull market in gold or a strong bear market in stocks, we’ve seen a lot of movements in bitcoin lately. Bitcoin’s correlation with gold and stocks is growing, but how, and why? Bitcoin, despite being the most widely used cryptocurrency, is relatively new.
Bitcoin (BTC) is an uncorrelated asset, or at least that is what was thought. For most of its existence, bitcoin has only been valuable to a very small group of people. Awareness and demand are now increasing rapidly. What does this mean for BTC’s status as a so-called uncorrelated asset? The fact that bitcoin is an uncorrelated asset is not just an assumption – the numbers confirm it. According to data collected by VanEck in early 2021, there was little to no discernible pattern between bitcoin’s movement and other markets, including the S&P 500, bonds, gold, real estate and others, from 2013 to 2019. But as the chart below shows, since 2020 there has been a significant change in the correlation patterns of various asset classes, particularly the equity markets and gold. Furthermore, data from Singapore’s DBS Bank shows that the correlation between bitcoin and equity markets will continue to rise until 2021. It should be noted that bitcoin’s increasing correlation with stocks and gold is not an anomaly. It is generally accepted that these markets are inversely correlated, with gold being a hedging instrument in times of equity market volatility. However, there is no doubt that equities and gold as a whole are in an upward trend for most of 2020 and 2021, in part due to market turbulence caused by macroeconomic factors. This diagram explains how BTC can correlate with both assets. However, the claim that bitcoin is most likely to correlate with gold seems to be increasingly weakening. Initially, this theory was based solely on the idea that investors might view BTC as a store of value in the event of a general market downturn, giving it the same safe-haven status as gold. However, Bitcoin has lived most of its existence in economically prosperous times, at least in the most developed countries, so this theory has never been tested.
No digital gold ?
According to analyst Oliver Renick of TD Ameritrade, BTC is much more correlated to macroeconomic events than gold. The head of commodities research at Goldman Sachs recently said that bitcoin is more like digital copper than digital gold. He says bitcoin behaves more like a buyer, in that it is a risk bearer, while gold is a risk hedge. Brandon Dallmann, director of marketing at exchange ecosystem operator Unizen, believes bitcoin is not a comparable asset to gold, he tells Cointelegraph : Bitcoin’s current volatility prevents it from truly being a stable store of value. Also, the price of gold tends to rise when other assets fall in value, while bitcoin does not have this constant up and down trend. However, if bitcoin takes on similar characteristics to gold, that may not be a positive for volatility enthusiasts, as its trading potential will undoubtedly decline. Recently, market demand seemed to indicate a more negative correlation between bitcoin and gold. The sell-off in cryptocurrency markets in May may have triggered a flight of investors to the yellow metal. Bitcoin’s correlation with equity markets seems to be going in a different direction. The events of the past 18 months or so have reinforced the argument that bitcoin is correlated to equity markets and that this connection could become even stronger. In March 2020, as equity markets began to fall due to widespread uncertainty over COVID-19, a Black Thursday for cryptocurrencies quickly followed. The recent volatility in bitcoin prices could be due to investor uncertainty about technology stocks. Barry Silbert also tweeted that cryptocurrency markets are correlated with stocks.
What connects BTC to stock prices?
There are several factors that explain why bitcoin is increasingly connected to the stock markets. First, the movement of meme stocks, which began in February with GameStop and recently resurfaced around AMC stock, has caused a stir in the stock market. The emergence of a new generation of digitally proficient investors bridging the gap between cryptocurrencies and equities may explain the growing correlation between the two assets. But another critical factor will likely be the inflow of institutional money into cryptocurrencies. While the non-correlation argument was valid when cryptocurrencies were dominated by retail investors, this is no longer the case. When one gets to a point where both markets consist of the same participants, correlation is logically inevitable. Related: GameStop inadvertently paves way for decentralized funding This correlation pattern also makes sense when looking at correlation data at the index or even individual company stock level. Although bitcoin’s correlation with the S&P 500 and Nasdaq indices is relatively low (0.2), companies investing in bitcoin have a much higher correlation: Tesla is at 0.55, MicroStrategy at over 0.7 and Grayscale’s Bitcoin Trust at over 0.8. If we extrapolate what this could mean if the institutional trend continues, it seems plausible that the correlation between bitcoin and the stock market will continue to rise as long as companies want to keep bitcoin on their balance sheets. However, Igneus Terrenus, head of communications at Bybit Exchange, thinks it will be a long time before that happens, reports Cointelegraph : In the long run, things may change when institutional adoption really starts to take off and more of the 40,000+ listed companies start adding BTC to their balance sheets. But for now, most institutional investors are using bitcoin as a diversification tool in their portfolios. We have yet to see any serious signs of convergence in price movements.
Correlation is not causation, and the link between bitcoin and the stock market is not one-sided. If stock market events can influence the BTC market, can the reverse also be true? This seems likely, especially given the continued interest of institutions in BTC. The flagship cryptocurrency will be more exposed to macroeconomic factors than when it was just a cryptocurrency. However, Bitcoin has its own market forces that could potentially affect global equity markets if the value of corporate balance sheets fluctuates. For example, the events associated with the halving of bitcoin’s value have a clear connection to price cycles. Daniele Bernardi, CEO of fintech management firm Diamond Partners, believes BTC’s own price cycles will override the influence of institutional investors, reports Cointelegraph : The main participants in cryptocurrency market dynamics are traders, so the emergence of institutional investors could reduce volatility, but I suspect the strong cyclical trends currently present in the bitcoin price will outweigh any correlation strength with other markets. It should also be noted that external factors such as electricity prices, the availability and cost of mining equipment, and regulatory changes affect the price of bitcoin. It is unlikely that many companies will invest in BTC with the same enthusiasm as MicroStrategy. They are likely to take a more cautious and diversified approach to investing in cryptocurrencies. However, the idea of a power outage in Xinjiang that could wipe trillions of dollars off the S&P 500 is somewhat frightening.
What about Altcoins?
Another intriguing question is what will happen to the rest of the cryptocurrency markets when bitcoin becomes more closely linked to the equity markets. So far, cryptocurrency markets have generally followed bitcoin’s lead, although there may be an exception. However, institutional interest in cryptocurrencies does not necessarily extend very far down the cryptocurrency rankings. So is a future possible where price movements in altcoin markets are less correlated with bitcoin because the investor base is divided between individuals and institutions? Related: Bullish all the way? MicroStrategy places two bets on Bitcoin The change in investor profile, although still in its infancy, is the simplest explanation for why BTC does not always perform as well as it did in previous halving cycles. Of course, there may be other factors. Regardless of what the future holds, it now seems indisputable that BTC is connected to global markets in a way that has never been matched in its existence.
Frequently Asked Questions
Does Bitcoin correlate with stock market?
Bitcoin’s value in relation to gold seems to be growing, with the cryptocurrency now being used for everyday purchases. Given the growing significance of bitcoin, experts have begun to examine its correlation with gold and stocks. With its recent surge, Bitcoin is now being used for daily purchases. As a result, there is growing speculation that Bitcoin could replace gold as a safe haven investment. Bitcoin is a digital currency that was created in 2009 by an unknown person or persons, or group of people. People begin purchasing Bitcoin in order to gain access to what is being called “virtual gold”. This virtual currency has become very popular with people who are skeptical about the value of the U.S. Dollar and the stability of U.S. banks.
Does Bitcoin correlate with gold?
“Buy Bitcoin, the cryptocurrency that is supported by gold, and the price of Bitcoin goes up.” – “Bitcoin Backwards”. Bitcoin, the first decentralized digital currency, has grown at a rapid pace in the last few years. The price of Bitcoin has increased from $100 to more than $2,000 in less than a year, but does this mean that it correlates with gold and stocks? This is my last blog post in a series about the correlation between Bitcoin and gold. I hope you’ve enjoyed it and learned something new. In this post, I will be addressing another common question I’ve seen on social media, Twitter in particular: Bitcoin’s correlation with gold and stocks.
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