Exploring the link between Bitcoin and Indices - What is it teaching investors?
Not only is Bitcoin (BTC) an incredibly volatile entity, but it’s also continuing to evolve both in terms of its price and correlation with other assets.
Historically, for example, BTC’s correlation to traditional asset classes has been noticeably low, but it’s interesting to note that this trend has begun to shift of late. In fact, the correlation between these two asset classes peaked in 2020, thanks to a number of different factors including increased adoption rates (we’ll touch on this further below).
But just how prevalent is this correlation today, and what does it teach investors and traders from across the globe?
Bitcoin is often referred to as ‘digital gold’, thanks to factors such as its finite supply and its status as a relative safe-haven asset that’s largely invulnerable to traditional macroeconomic factors.
COPYRIGHT_WI: Published on https://washingtonindependent.com/exploring-the-link-between-bitcoin-and-indices/ by Liam Evans on 2021-09-06T14:17:08.054Z
Interestingly, this trend has actually been in focus since 2018, when BTC began to demonstrate a growing correlation with the world’s largest stock index before this reached an eight-year peak last year.
But what did this correlation look like? Between 2018 and 2020, BTC mirrored the peaks and troughs of S&P 500, with the latter experiencing three dips of at least 10% or more during this period.
The only difference was that BTC tended to record more severe and exaggerated peaks and troughs, thanks to its inherently volatile nature and fundamental lack of tangible value.
Some experts have argued that the peak in 2020 will have been exacerbated by the coronavirus pandemic, and we’ll explore this assertion in a little more detail in the next section.
However, the fact remains that BTC’s correlation with the stock market began to decline towards the end of 2020, before falling below 0.2 at the start of the new year.
So, while both BTC and the S&P 500 have embarked on a strong upward trend through 2021 to date, the former has doubled in value during this time while the latter has only grown by roughly 8.5%.
Logic tells us that cryptocurrencies should move inversely to traditional assets in times of crisis, as they’re not managed by a central authority and therefore cannot be manipulated as part of wider quantitative easing measures.
This also makes crypto assets largely immune to macroeconomic shifts and changes, establishing market leading tokens like BTC relative safe havens that would have attracted investors during the pandemic.
However, there’s ample evidence that Bitcoin has become an increasingly mainstream asset in recent times, and despite its innate volatility, it has seen its value grow more than four-fold during the last 18 months.
Thanks to the combination of rising value and increased adoption rates (especially in the financial services sector), Bitcoin and similar assets have become more closely correlated with traditional stocks and particularly during periods of economic crisis.
This is part of a wider trend, of course, with BTC, stocks and gold having all enjoyed strong correlation in recent times and particularly through 2020.
This has much to do with increased personal and institutional demand in BTC than anything else, as the inflow of corporate funds into the crypto space continues to increase incrementally.
Similarly, we’re also seeing a shift in the make-up of retail traders, many of whom are younger, more digitally savvy and increasingly likely to bridge the gap between BTC and traditional assets.