Relationship of Bitcoin to the Stock Market

Relationship of Bitcoin to the Stock Market

Many stock market investors have doubted whether a correlation exists between stocks and Bitcoin. However, a number of them have stated that the value of these two are correlated during panicky moments. Recently, Bitcoin investors and enthusiasts have been shocked by the drop in its value in sync with the massive price drops in global stock indices. If this trend continues, it could clear doubts that the two correlated.

Expert views on the Trend

Some experts have stated that cryptocurrencies may be doing what more volatile asset classes did in premature equity markets. An example is the Dotcom stocks in the 90s.
Market emotions can have an impact when more conventional assets such as stocks and more digital assets such as cryptocurrencies show meaningful similarities. Such situations are driven by events that make people go in aggregate, crowding away or to particular type of asset.
In 2017 for example, the two assets recorded striking winnings throughout the year. This was followed by a dump in the early 2018, and the two seemed as if they were tracking each other’s similarly. This means that the correlation between the two depends on the time frame and the situation at hand. In the short-term, there have been situations where stocks and cryptocurrencies like Bitcoin have progressed together, be downwards or upwards.

Bitcoin Wasn’t Always Correlated

According to some analysts, Bitcoin is in a macro upward trend since its inception, and there are numerous ups and downs coming on its way.
Previous studies had concluded that there is no substantial amount of correlation between Bitcoin price and the S&P 500. According to Blockforce Capital, a US-based asset manager, the long-term correlation between the two is weak. Blockforce Capital analyzed Bitcoin and the Standard & Poor’s 500 Index from January 2015 to Oct. 11, 2018. It was from this research they found that the correlation between the two wasn’t substantial.

What About the Pearson Correlation Coefficient?

Pearson Correlation Coefficient is another analysis that can help you comprehend the relationship between the two asset classes. The coefficient shows the power of the relationship between the two variables. It quantifies the linear relationship between asset prices. The coefficient shows a positive correlation in price percentage (%) changes in S&P 500 and Bitcoin since the beginning of 2020.
The coefficient shows that this relationship has been very positive since the beginning of 2020. The correlation may become more prominent in the future as traditional investors who employ a conservative approach join the crypto market.
A research done by DataTrek shows that the correlation between Bitcoin and stock market prices becomes more eminent when sentiments, instead of core fundamentals, are the main drivers of movements in the economic markets. This was clearly evident in in 2018 when The S&P 500 Index dropped by 10.2% after the correction took place between 26 January 2018 and first week of February. During this very time, the price of Bitcoin also dropped by 25.7%.
Again, crypto assets like Bitcoin have existed for only a short period of time, which is about 12 years. This means crypto is a young asset class and it cannot be trusted as a safe haven commodity like bonds, gold and treasuries that are commonly used for hedging uncertain times.
If the market’s risk-taking speculators lose their longing for the volatile, biggest-returning assets, a large and general drop in asset prices usually occurs. A high number of investors normally choose to go with small, correlated assets in order to diversify their investments.