The Bitcoin market often feels the effects when the stock market wobbles or takes a nosedive. For investors, this correlation needs to be solved. It can lead to confusion when making investment decisions, as it often needs to be clarified how Bitcoin will behave during tough economic times. Understanding the correlation between Bitcoin and the stock market is essential for developing a sound investment strategy for Bitcoin, especially during turbulent economic periods. This article will help you understand how Bitcoin's correlation to the stock market affects your investment strategies, enabling you to make informed decisions that maximize profits and mitigate risks. Stay tuned for reliable bitcoin indicators.
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Why Does BTC Seem To Mimic the US Stock Market?
For years, Bitcoin was thought to be insulated from traditional market forces, making it a haven for investors looking to protect their funds from volatility in the stock market. Nevertheless, this assumption has proven incorrect as Bitcoin has grown in popularity. Historically, Bitcoin has moved in tandem with the stock market, particularly during periods of extreme volatility.
The History of Bitcoin's Correlation to the Stock Market
Bitcoin went live in 2009, and there was almost no correlation between Bitcoin and the S&P 500 for the first several years of its life. Until 2012, Bitcoin prices were very stable, while S&P 500 prices had their usual steady rise with some dips.
The first significant Bitcoin jump, in late 2013 and early 2014, had no corresponding S&P 500 increase. The stock market dip in late 2016 happened simultaneously with a Bitcoin price increase. Bitcoin prices fluctuated rapidly, while S&P 500 price changes were less drastic. Peaks and valleys for Bitcoin and S&P 500 prices showed almost no similarities until 2018.
Correlation Between Bitcoin and the Stock Market
A look at recent Bitcoin vs. stock market charts shows far more correlation. The value doesn't perfectly mirror the S&P 500 index, but comparing Bitcoin and the S&P 500 reveals some relationships. We can tell this by examining how it behaves during volatile S&P price swings.
Bitcoin's Volatility Compared to the S&P 500
Over the past four years, Bitcoin has begun to mimic S&P 500 movements. During the big dips of January 2018, September 2018, and March 2020, Bitcoin prices also dropped. Interestingly, Bitcoin vs. stock market charts show that Bitcoin's drops seem even more drastic. While the S&P usually only experiences dips of around 10%, Bitcoin has weathered crashes of over 50%.
In the last three years, there has also been an increased incidence of Bitcoin moving when stocks rise. The correlation between Bitcoin and stock market charts is most drastic when stock prices drop.
Bitcoin follows general market trends for stock stability and surges. Bitcoin has recently begun to mimic the stock market even more closely. Bitcoin and the S&P 500's 90-day correlation reached record levels in March. As of 2022, there's been no sign of a Bitcoin stock market decoupling.
Key Examples of Bitcoin's Correlation to the Stock Market
Looking closely at Bitcoin and Nasdaq composite prices over the past four years, the Bitcoin correlation to the stock market is even more noticeable. Based on Bitcoin vs. stock market charts, here are some key examples of Bitcoin's correlation to the stock market:
- December 2018: Both Bitcoin and Nasdaq prices dropped to record lows. Bitcoin reached $3,689, while Nasdaq was at $6,192.
- June 2019: Bitcoin and Nasdaq undergo a sudden, sharp price peak.
- Feb. 2020: Both Bitcoin and Nasdaq reach record highs for the quarter before rapidly plunging.
- March 2021: Values for both Bitcoin and Nasdaq soar to unusually high levels.
- October 2021: After maintaining high prices for months, Bitcoin and Nasdaq prices both begin to drop and do not recover for the rest of the year.
- November 2021: Starting in November, Bitcoin's correlation to the stock market becomes even stronger. Since then, it has followed Nasdaq movements almost identically, as mining stocks have soared in popularity.
- May 2022: Both Bitcoin and Nasdaq experience a significant price drop, followed by a slight increase. By this point, Bitcoin is mirroring even small Nasdaq movements.
What’s Causing the Bitcoin Stock Market Correlation?
There's no single reason for Bitcoin’s correlation to the stock market. Instead, based on Bitcoin vs. stock market charts, multiple factors contribute to the similarities. Like the stock market, Bitcoin is closely affected by supply, demand, and investor sentiments.
Factors Affecting Bitcoin and Stock Market Prices
Prices for both tend to rise when there’s high demand, positive market outlooks, and limited supply. Prices for both tend to drop when investors worry about the future or encounter worrying economic policies. Therefore, it's no surprise that Bitcoin waxes and wanes with the stock market.
Institutional Investors and the Bitcoin-Stock Market Correlation
Institutional investment behavior appears to be a key driver behind Bitcoin’s correlation with the stock market. In stark contrast to the average retail investor, large institutions invest based on extensive financial research and data.
They don’t necessarily view Bitcoin and the stock market as separate entities. Instead, they see both options as part of a diversified portfolio and often allocate money to both simultaneously. This can lead to synchronized movements.
The Financial System's Interconnectedness
The global financial system's interconnectedness also influences Bitcoin’s correlation with the stock market. As an emerging asset, Bitcoin is increasingly susceptible to the same economic forces that impact traditional markets.
In addition, both Bitcoin and the stock market are influenced by risk-on and risk-off sentiment. For example, if investors become anxious about a potential recession, they might withdraw money from both, causing prices to drop.
The Growing Correlation Between Bitcoin and the Stock Market
That being said, some factors reduce the correlation. Bitcoin isn't under the same regulations and government policies as the stock market. For example, the 2021 Chinese government shutdown of Bitcoin mining affected Bitcoin prices but not the stock markets.
Technological dissimilarities exist because the stock market isn't affected by data storage issues and power shortages, which affect Bitcoin miners.
So why are the recent charts still showing so much correlation? The answer lies in the increased connectivity of stocks. Its popularity has made it very similar to traditional stock holdings. The same investors tend to invest in stocks. Oftentimes, an investment portfolio may include both options. Spillover from Bitcoin returns often gets invested in the stock markets, and vice versa.
As the Bitcoin correlation to the stock market increases, investors become aware of the similarities, making even more decisions assuming that stock and Bitcoin are identical. The close relationship between stock and Bitcoin investing is causing both markets to mimic each other.
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Bitcoin Correlation To Stock Market, Gold & the S&P 500
Bitcoin’s correlation with traditional assets, like gold and the stock market, including the S&P 500, has been a topic of interest for many years. The digital asset has often been too volatile to act as a reliable store of value in times of economic uncertainty. Nevertheless, as previous times have shown, Bitcoin may swing up or down double-digit percentages in hours, which may occur several times a week.
As BTC progressively garnered much investor interest, many have attempted to identify whether it is correlated to the movement of other more traditional assets, such as:
- Gold
- Commodities
- Overall stock market
Online, it was noticeable that although separate sources pinpointed specific dates when BTC correlated to Gold or the S&P 500 index, finding data that brought a timeline of BTC’s correlation to these assets was more challenging. This article aims to clarify that aspect and provide visuals purporting when BTC correlated more actively to Gold and the S&P 500 over the past five years.
For that purpose, I will provide two graphs with a brief written description, one of BTC compared to Gold and the other comparing the digital currency to the S&P 500 index, followed by an analysis of the findings.
Tracking the Correlation Between Bitcoin and Gold
It is worth mentioning that “positive” correlation indicates that both assets move in the same direction, whereas negative correlation indicates that assets move opposite (for example, when gold falls in price and BTC rises or vice versa). The specified graphs below do not display how “strongly” those assets correlated; they aim to show whether the correlation was +ve or -ve simply.
Figure 1 displays the price of one BTC with periods of positive (green) and negative (red) correlation to Gold.
Correlation Between Gold and BTC
2018
- January to May: NEGATIVE
- May to October: POSITIVE
-
October to end of year: NEGATIVE
2019
- January to June: NEGATIVE
- June to mid-October: POSITIVE
- Mid-October to Mid-November: NEGATIVE
-
Mid-November to end of Year: POSITIVE
2020
- January to November: POSITIVE
-
November to end of Year: NEGATIVE
2021
- January to November: NEGATIVE
-
November to end of Year: POSITIVE
2022
- January to end of January: POSITIVE
- February to May: NEGATIVE
- May to November: POSITIVE
-
December to end of year: NEGATIVE
2023
- January to mid-January: NEGATIVE
- Mid-January to April: POSITIVE
Analyzing Bitcoin's Correlation with the S&P 500
Figure 2 displays the price of one BTC with periods of positive (green) and negative (red) correlation to the S&P 500 index.
Correlation Between BTC and the Stock Market (S&P 500 Index)
2018
- January to Mid June 2018: POSITIVE
- Mid June to October 2018: NEGATIVE
-
October to end of Year: POSITIVE
2019
- January to Mid-October: POSITIVE
-
October to end of Year: NEGATIVE
2020
- January to February: NEGATIVE
-
February to end of Year: POSITIVE
2021
- January to May: POSITIVE
- June to August: NEGATIVE
-
August to end of Year: POSITIVE
2022
-
January to end of Year: POSITIVE
2023
- January: Slightly NEGATIVE
- End of January to April: POSITIVE
Observations About Bitcoin's Correlations with Gold and the Stock Market
Bitcoin correlates more positively, often, and for extended periods with the overall market than with gold. This may mean that Bitcoin’s price movements are generally affected by similar events that affect the general market and positive and negative volatility.
These events may range from monetary policy decisions to geopolitical environments to natural economic cycles, and Bitcoin doesn’t seem immune to them. This may be because retail investors see it as a riskier investment opportunity alternative focused on risk-tolerant buyers.
Bitcoin's Unique Correlation Patterns
Gold, which is typically associated as inversely related to the stock market, also showed a period of positive correlation to Bitcoin. These correlations make Bitcoin quite distinct from Gold and the overall stock market. Could we see that as a distinctly unique newly formed asset class in the future? Perhaps, but it is still too early to tell, considering the technology’s relatively infantile presence in financial markets.
Considering that historically, investors would turn to gold in times of “general uncertainty” (economic mainly but geopolitical, amongst others), does Bitcoin hold a similar relationship? I would argue that only partially, and in my opinion, Bitcoin will distinguish itself as a separate asset class from Gold, as also a refuge from uncertainty but not necessarily merely “general economic uncertainty.
Bitcoin as a Hedge Against Currency Volatility
As was noticed last year, Bitcoin can protect against forex risk or national currency volatility. Although it is often labeled as highly volatile, it is, in fact, less prone to solid purchasing power loss, as we have seen in recent tumultuous markets in geographies like:
- Turkey
- Argentina
- Lebanon
Will more retail investors transition to Bitcoin to prevent substantial currency devaluation losses? This may be different in countries with a more stable currency. Still, for individuals where stability is not guaranteed, Bitcoin may be a solid alternative with a compelling argument to tell.
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Factors for the Erratic Nature of the BTC-Nasdaq Correlation
The correlation between Bitcoin and Nasdaq has been erratic, showing both positive and negative values over different periods. While the regression analysis has established that macroeconomic factors like the FED FUNDS RATE do not significantly influence this correlation, other factors may explain the erratic nature of the BTC-NASDAQ correlation.
Market Sentiment and Speculation
Investor Behavior
Investor sentiment often drives Bitcoin and tech stocks. Fear of missing out (FOMO) can lead to sharp increases in correlation as investors rush to buy both assets. Panic selling can lead to sharp declines. High volatility and speculative trading in both BTC and tech stocks can cause rapid shifts in correlation. Speculative bubbles or crashes in either market can influence correlation values.
News and Social Media
Positive or negative news about major tech companies can sway investor sentiment, leading to erratic correlation movements. Platforms like Twitter and Reddit can drive investor behavior in both BTC and stocks, leading to sudden and unpredictable correlation changes.
Technological Developments and Adoption
Blockchain and Innovations
Innovations in blockchain technology and projects can affect BTC's price independently of the stock market. Changes in BTC adoption rates by retail and institutional investors can lead to fluctuating correlations.
Tech Sector Dynamics
The performance of major tech companies, especially those involved in blockchain technology, can influence the BTC-NDXT correlation more strongly than the broader BTC-NASDAQ correlation. Quarterly earnings reports from tech giants can cause significant market movements, impacting correlations.
Regulatory and Legal Developments
Tech Sector Regulations
Changes in regulations affecting tech companies, such as antitrust actions or new privacy laws, can lead to significant movements in tech stocks, influencing correlations with BTC.
Market Liquidity and Institutional Involvement
Liquidity Crises
Liquidity crises in the market, such as exchange failures or large-scale hacks, can lead to sharp declines in BTC prices, impacting correlations. Changes in market liquidity due to actions by central banks or major financial institutions can affect both BTC and stock markets.
Institutional Investment
The entry of institutional investors into the BTC market can lead to higher correlations with stock markets, as these investors often trade across multiple asset classes. Institutional hedging strategies involving BTC and tech stocks can influence correlations, especially during periods of market stress.
Bitcoin's Increasing Presence in Financial Markets
Through this institutional participation and growing acceptance of the digital asset, Bitcoin has become more embedded into the global financial markets in various ways. For instance, Coinbase is now a listed company, and as a trading platform, its stock price is known to have a heavy correlation with Bitcoin.
The FTX Collapse and Coinbase's Stock Price
In January 2023, as Bitcoin surprised the market by rallying following the collapse of FTX two months earlier, Coinbase shares jumped accordingly. Coinbase is listed on NASDAQ, and as such, the “Bitcoin effect” on its stock prices will also be mirrored in any index that tracks the performance of NASDAQ companies.
Similarly, the creeping presence of BTC on corporate balance sheets will also play a part in creating a further correlation between Bitcoin and the global equity markets. The four public companies with the largest BTC balances, all listed on NASDAQ, include:
- MicroStrategy Inc.
- Marathon Digital Holdings
- Coinbase
- Square Inc.
The Impact of Bitcoin on NASDAQ-Listed Companies
The rise and fall of Bitcoin will have a direct impact on the valuation of these companies, with the extent depending on their exposure. This also explains why the NASDAQ Composite index frequently shows a slightly higher BTC correlation than the less tech-heavy S&P 500, as shown in the correlation chart above.
Erratic Correlation Explained
The erratic movement of the BTC-NASDAQ correlation can be attributed to a complex interplay of factors beyond traditional macroeconomic forces. By acknowledging these diverse influences, investors and analysts can make more informed decisions in a rapidly evolving market landscape.
The Benefits and Dangers of High Stock Market Correlation
What does the Bitcoin and S&P 500 correlation mean for the typical investor? There are both pros and cons to the Bitcoin stock market correlation. With a strong Bitcoin correlation, investing becomes much more predictable. When Bitcoin vs. stock market charts are similar, you can more easily notice market trends and make smart choices. Furthermore, since stock values always rise in the long run, a Bitcoin correlation to the stock market could mean more long-term gains for investors.
Though some benefits exist, you don't necessarily need to fear a Bitcoin stock market decoupling, which could be good news for investors who want to diversify their portfolios. Having two separate sets of assets that don't drop simultaneously is a great way to weather financial crashes. If the Bitcoin stock market decoupling does occur, people may have more opportunities to hedge against a crash.
The Pros and Cons of Bitcoin's Correlation to the Stock Market
Whether or not a Bitcoin stock market decoupling is a “good thing” depends on your investment strategies. A high Bitcoin correlation to the stock market is a positive for those using stock market predictions to make Bitcoin trading strategies. Investors who haven't adequately diversified their portfolios might find that Bitcoin's correlation to the stock market makes them more vulnerable to market downswings.
A strong correlation with the stock market can help investors understand Bitcoin's price movements, making them more predictable.
Will Bitcoin Decouple From the Stock Market?
Bitcoin’s correlation to the stock market has been a hot topic for investors in 2022. As the stock market has stumbled, so has Bitcoin, leading many investors to wonder when the correlation might break.
The Persistence of Bitcoin-Stock Market Correlation
If your investment strategy has focused on Bitcoin following the stock market, you need to look for a Bitcoin stock market decoupling. Experts predict that such an event will be around for a while. As more and more people begin to conflate Bitcoin and stock market charts, the two assets are even more likely to affect each other. A mild correlation to the stock market seems likely to persist for the rest of the year.
The Inevitability of a Bitcoin-Stock Market Decoupling
That being said, some degree of Bitcoin stock market decoupling is inevitable. The main reason is that Bitcoin tends to be a little more volatile. In a sell-off, Bitcoin prices tend to plummet slightly more drastically than traditional stocks and recover sharply. With stock prospects for the latter half of 2022 looking grim, there may be indications that Bitcoin’s value will begin to fluctuate at different rates than those of stock values.
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