It’s no secret why there’s a new wave of investors in today’s market that have never put a single penny into a stock. It’s simple. In the past 10 years, Bitcoin has outperformed every asset class in history with flying colors. I’m not saying it’s not volatile or risky to trade Bitcoin, but the crypto gains from the last decade are incomparable to those of the stock market. In the past, Bitcoin was notorious for being completely decoupled from the stock market. Some would even say it was a safe haven due to its inverse correlation with traditional markets. But more recently, due to crypto tiptoeing toward mass adoption, more institutional money has been injected into the asset class than ever before.
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As a result of this, charts have become more and more correlated over time. Yes, there are always exceptions to the rule, and nothing in finance is ever a straight line. But today, I want to investigate this correlation and talk about its significance moving into the future. Let’s get it! In this video, we’re going to take a look back at the correlation between Bitcoin and the stock market, why they were decoupled, where it is now, and why it matters. You can be lazy and draw a straight line on the charts from 2012 to 2022 and say that Bitcoin and the S&P both went up into the right. That’s fair. But there’s thousands of gaps on the way from A to B when they were on completely different pages, sometimes in direction and always in volatility. When Bitcoin first took off, investors flocked to crypto in droves because they wanted exposure to an asset that was uncorrelated to the traditional markets. Uncorrelated assets turn heads and create attention. This is how it got the nickname digital gold, the millennium’s new hedge against inflation.
Not only that, but a reason Bitcoin spent a majority of its lifespan decoupled from the stock market is because it has a different cycle, which gives it a life of its own. It’s clear that the two move closer together during geopolitical black swans. But the stock market doesn’t cut its incoming circulating supply in half every four years. Bitcoin’s halving cycle is a catalyst for the separation, and the difference in volatility is a byproduct of the halving. Because of its four-year cycle, Bitcoin has proven to be reliable in times of uncertainty. In 2016, despite China’s slowdown, Brexit and Trump getting elected, Bitcoin had a strong year because it was in an accumulation phase building up to the halving that July. From the start of 2019 to 2021’s all-time high, Bitcoin went up about 1800%. The same timeframe, the S&P grew 90%. A big reason Bitcoin is so much more volatile, besides it being a scarce highly speculative controversial asset is its market cap. Bitcoin’s market cap is currently below $600 billion, while the S&P’s market cap is over $40 trillion. With that taken into account, of course, the S&P is going to move much, much slower, and it would take a lot more money to make it move like Bitcoin.
Now, before I go any deeper into this, if you’re new to crypto or new to investing altogether, it’s not a bad idea to learn about the stock market because as time goes on, you will need to become a well-rounded trader. You need to have a well-rounded grasp on the entire realm of finance, stocks and geopolitics included. If you don’t know, the S&P 500 is a market capitalization weighted index of the top 500 publicly traded companies in America. It’s the most common gauge of the performance of the stock market. Since they’ve both come down from their all-time highs at the end of last year, the S&P and Bitcoin have never been so close in correlation. This is measured by the correlation coefficient, a range between one and negative one. One would be when they are moving perfectly in synchronous together, and negative one would be when they are both going in the complete opposite direction. According to Arcane Research, between 2014 and early 2020, Bitcoin’s 360-day correlation with the S&P 500 hovered around zero. This was the time of Bitcoin’s lifespan where it spent sometimes slightly correlated with the stock market and sometimes slightly negatively correlated. But since it couldn’t make up its mind, it hovered around zero. It’s safe to say during that timespan that they were decoupled.
Of course, there were times when they were both in the green or both in the red, but there were also times like in April and May of 2019 when Bitcoin pumped roughly 70% and the S&P fell 7%. The point here is that just because they both went up overall between 2014 and 2020, it doesn’t mean that they were correlated. If correlation is not causation, a high of 13% correlation in a six-year span is nothing at all. This all changed on Black Thursday, when the pandemic lockdowns began. Both markets panicked, and massive selloffs and liquidations ensued. When this happened, the yearly coefficient, or the correlation between them, increased to 0.25%, the highest it’s ever been at that point in time. In 2021, the coefficient fell to 0.2% since Bitcoin had a double top and the S&P 500 didn’t. Nevertheless, the 360-day correlation coefficient has remained above 0.2% since the summer of 2020. Big reason the coefficient has continued to increase since then is that crypto has gotten a lot of institutional money injected into its market cap.
During a time the two assets were decoupled, Wall Street and all the big institutional ballers were in the dugout yelling at the umpire. Now, they’re very much in the game, and that plays a large role in the continued positive correlation. Because of this, the S&P has recently been a powerful TA tool for day traders because it has been leading Bitcoin’s price action more times than not. Now, in May of 2022, due to the Fed’s hawkish approach to get inflation under control, both assets have crashed in unison. Bitcoin’s correlation to the S&P 500 hit a 17-month high, and the 90-day coefficient rose to 0.49%. We know that the Fed plans to continue to hike up the basis points at every meeting this year. And this political factor has seemed to tighten the correlation. There are five meetings left this year, and the next one begins on June 14. This pattern may continue for longer than we’d like, given the circumstances of a looming recession.
In my opinion, this is just another sad note in the bear market blues. Silver lining here is, if you’re day trading, given the current heightened correlation, you can lean on the pre-markets for a glimpse of the day’s direction. In time, hopefully, by the end of the year, we will hit a bottom and start accumulating again. I know that because the next halving is projected to take place on March 2, 2024, around September or November 2025, the main factor that has historically decoupled us from the stock market will once again be put to the test. The good news is TradFi has never gone through a halving before. They’re used to the current supply being generated from the miners, but the next halving in 2024 is going to knock their socks off and can set up a parabolic Bitcoin and altcoin season that wouldn’t just see Bitcoin overtake the market cap of gold, but Ethereum displace Wall Street as the future of finance.
This article is a transcription of a video made by Andy Bitcoinsensus
Original video: https://youtu.be/W93kT2cw2bo