It is no hidden fact that the cryptocurrency market is extremely volatile and susceptible to many variables, be it foreign exchange rate fluctuations, decentralized finance (DeFi), monetary policies, region-specific regulation, or FUD (fear, uncertainty, and doubt).
However, crypto pundits are still trying to determine if a direct relationship exists between traditional stock markets and cryptocurrencies. Over the years, cryptocurrencies like Bitcoin (BTC-USD) have established themselves as exceptional investment opportunities, witnessing an enormous influx of both retail and institutional investors.
Even though billions of dollars have landed in the crypto marketplace, the hypothesis that BTC or any other cryptocurrency may serve as a haven for investors, similar to gold and U.S. treasury bonds during a global equity sell-off, is yet to be tested. As of now, there are mixed opinions on the correlation between the stock market and cryptocurrencies. Industry leaders have diverse thoughts, some underlining the relationship, while others claim that more time is needed to reach a concrete conclusion.
The idea that Bitcoin is digital gold and a possible hedge against inflation has been floated routinely, but not every financial expert agrees. For now, Bitcoin can be classified as an asset that doesn’t exhibit a strong long-term relationship with gold and the bond market. However, with more financial institutions entering the space, we might see a more robust correlation emerge, at least over the long term.
Opposing Opinions
According to Ben Caselin, Head of and Research and Strategy at AAX, “Although the inflation hedge thesis is strong for Bitcoin, overall the crypto markets have become increasingly tied to the stock market, especially under current macro conditions. There is a good chance that Bitcoin is departing from its 4-year cycle. This might temporarily mean increased correlation with the stock market. However, at the core, crypto markets live a life of their own and I would say that their aggregate growth potential far exceeds anything found in traditional markets today.”
Meanwhile, some financial experts believe that cryptocurrencies may be performing similarly to the entrance of more volatile industries in equity markets, like the dotcom stocks of the '90s, which included various speculative internet stocks. On the other hand, data compiled by U.S.-based asset manager Blockforce Capital highlights that cryptocurrencies, and more specifically Bitcoin, acted on their own during their early days, citing no direct correlation between the price of BTC and the S&P 500, between January 2015 and October 2018.
Citing a different view, Tae Oh, Gluwa Founder and CEO, suggests that the crypto-to-stock link is more rotational in nature and indicative of an inverse relationship, adding, “When the market expects a bounce-back, it will pull capital from crypto to top up its stocks. If the withdrawal seems like a long-term trend, crypto will benefit.”
In another contrast, according to VanEck data published in early 2021, there was no discernible correlation between bitcoin prices and those of other major markets, such as the S&P 500, bonds, gold, real estate, and others, for the period between 2013 to 2019. However, since the beginning of 2020, the correlation coefficient between bitcoin and the stock market shows a high positive correlation, indicating that directional momentum is closely related.
If we look at the performance data for 2020, when markets collapsed at the outset of the COVID-19 pandemic, Bitcoin’s correlation with stock markets took a different turn, following which the interrelation between these two asset classes became deeper. DataTrek Research, in its report, implied that the correlation between cryptocurrencies and the traditional stock market is more evident when sentiment, rather than core technical indicators, is taken into account. Another report, by Singaporean bank DBS, underscores the rising correlation between Bitcoin and stock markets throughout 2021.
To this extent, JD (NASDAQ:JD) Gagnon, Co-Founder of BENQI, notes, “A pullback in the stock market will most likely have short-term implications on the prices of overall crypto markets. However, bitcoin today is seen as an alternative store-of-value. The flow of capital into bitcoin and eventually the crypto markets would not be an impossibility as DeFi offers better yields compared to traditional markets.”
Conclusion
While Bitcoin’s correlation with the S&P 500 and Nasdaq Composite is still relatively low, the fact that Bitcoin and other cryptocurrencies haven’t been around during major economic catastrophes makes it complicated for analysts to derive absolute conclusions.
As a rather young asset class, only time will tell if the playing field transforms cryptocurrencies into a safe-haven investment like gold, bonds, and treasuries to hedge against economic turmoil, or if it will directly reflect the stock market’s price momentum.
Disclosure: At the time of publication, Reuben Jackson did not have a position in any of the securities mentioned in this article.
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