Bitcoin
Aren’t Crypto and Stock Markets Still Related? By U.Today
U.Today –
BTC as a source of diversification
is known for its extreme volatility, with significant price swings like a rollercoaster ride – dropping over 64% in 2022 and then rising 160% in 2023. This volatility can be challenging for crypto traders.
On the other hand, the S&P 500 offers a more stable performance, with average annual returns of 9% to 10% and serving as a benchmark for the US economy. Despite lower returns compared to Bitcoin, the S&P 500’s consistency and reliability make it a preferred choice for risk-averse investors looking for predictable investment results.
Cryptocurrency allocations can diversify risk and increase returns in traditional portfolios, according to Glassnode.
For example, adding small allocations to the Coinbase (NASDAQ:) Core Index (COINCORE), a market capitalization-weighted crypto index composed primarily of Bitcoin (70.9%) and Ether (21.9%), for a 60/ 40 (60% MSCI ACWI and 40% US Agg) increased absolute and risk-adjusted returns over a five-year period ending March 31, 2024.
Strong performance in the first quarter
Bitcoin (BTC) had an impressive first quarter of 2024, recording a 69% return and outperforming most traditional asset classes, according to the joint report from Coinbase and Glassnode.
Despite the launch of BTC ETFs, which many thought would lead to stronger correlation with traditional financial assets, BTC has shown minimal correlation with major asset classes using data from a recent institutional report from Glassnode and Coinbase. This suggests its potential as a valuable component for diversification within a portfolio.
Bitcoin correlated negatively with the DXY index and gold, while its correlation with the S&P 500 was low at 0.11. This suggests that Bitcoin price movements are largely independent of traditional markets.
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However, at the start of the second quarter, BTC fell 15% from its highs, coinciding with the DXY index rising above 106, further highlighting the negative correlation between the two.
The Q2 report also noted a decrease in Bitcoin volatility since January 2020, with spikes becoming less pronounced. Although volatility is currently slightly below 60%, the report emphasizes a long-term downward trajectory despite occasional spikes above the trendline, particularly during 2020 and 2021.
As Bitcoin continues to mature and become a major asset class, its volatility is expected to continue to decrease over time.
Why the stock market is important
According to Tastylive research, there is generally little correlation between Bitcoin and the S&P 500, except during significant Bitcoin price movements (+5% or more upward, or less than -5% downward).
When Bitcoin price movement exceeds 5%:
- Average change in the S&P 500: 0.42%.
- Median variation of the S&P 500: 0.19%.
- Standard deviation: 1.53%.
- Average change in the S&P 500: -0.67%.
- Median variation of the S&P 500: -0.34%.
- Standard deviation: 2.31%.
- Average change in the S&P 500: 0.09%.
- Median variation of the S&P 500: 0.11%.
- Standard deviation: 1.11%.
This created a favorable environment for risk-on trades, leading to rallies for both Bitcoin and the S&P 500 index despite bearish sentiment following the 2022 correction.
As Bitcoin’s correlation with traditional stock markets such as the S&P 500 and Nasdaq increases while its correlation with gold decreases, this suggests that Bitcoin is behaving more like a risk-on asset rather than a safe harbor.
When investors feel adventurous, they often gravitate toward stocks and digital currencies for the potential for higher profits.
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The growing involvement of institutional and retail investors in the stock and cryptocurrency markets could lead to simultaneous buying and selling decisions, aligning the price movements of these assets.