While many stock market pundits have doubted whether stocks and Bitcoin have any correlation at all, others have said the value of two asset classes is very much correlated during panicky moments.
One event that has shocked Bitcoin investors and enthusiasts in the past week is the sudden crash of the value, in sync with massive price declines in global stock indices, from around $9000 on 7 March 2020 to about $5000 on 13 March 2020 (time of writing this article). The event disproved the hypothesis that Bitcoin may serve as a safe haven for investors, similar to gold and US treasury bonds during a global equity sell-off.
While many stock market pundits have doubted whether stocks and Bitcoin have any correlation at all, others have said the value of the two asset classes is very much correlated during panicky moments.
According to a few experts, cryptocurrencies may be performing a function which more volatile asset classes performed in premature equity markets, like the Dotcom stocks in the 90s, which encompassed various speculative internet stocks.
Market emotion can perform a vital function in circumstances when both more conventional assets like stocks and more new digital assets or cryptocurrencies exhibit meaningful similarities. These situations are often driven by events that drive people to go in aggregate, crowding to or away from individual kind of asset.
Throughout 2017, for instance, both assets witnessed striking winnings, followed by a dump in early 2018, and once again, it seemed the two were tracking one other similarly. This means one thing clearly- the correlation is heavily dependant on the time frame and situation at hand. In the short-term, there are absolutely situations where stocks and the crypto assets like Bitcoin and Ethereum have progressed together, be upwards or downwards.
Bitcoin And Crypto Market Wasn’t Always Correlated
Some analysts have stated that Bitcoin earlier did its own thing as it may not be owned by institutions like all the others are. According to them, BTC is in a macro uptrend since inception and has many many ups and downs along the way.
Based on these measurements, studies had concluded that there was no substantial correlation between the price of Bitcoin and the S&P 500. In the long-term, the correlation between the two is rather weak, according to Bloomberg data compiled by U.S.-based asset manager Blockforce Capital.
Moving on, another analysis that can benefit investors to comprehend the relationship between the stock market and Bitcoin’s value. One well-known indicator called the Pearson Correlation Coefficient is used often. The coefficient shows how powerful the relationship is in two variables. The coefficient quantifies the linear association between asset prices. If the asset classes are perfectly correlated, then the measurement is 1.0 and vice versa for the negative correlation.
Correlation Coefficient Shows High Positive Correlation Since The Beginning Of 2020
What is seen is that since the beginning of 2020, the correlation has been very positive. Moving in future, the correlation may also become more prominent as “traditional” investors with a conservative approach to investment may enter the crypto market.
A report by DataTrek Research implied the correlation in bitcoin (and crypto market) and stock market becomes most eminent when sentiment, rather than core fundamentals, is the main operator of movements in the economic markets.
During the stock market correction that happened at the beginning of 2018, the correlation ran an all-time high. In fact, we can notice that correlation is most potent when both bitcoin and equity market are declining. This is what is happening at the very moment.
A major portion of the understanding of why it’s so tough to indicate a negative correlation at the current moment between Bitcoin and global economic vulnerability is due to the duration that the crypto asset has existed, which is about 12 years.
This makes crypto quite a young asset class and most experts believe investors do not trust it as a safe haven commodity like gold, bonds and treasuries used to hedge uncertain times.
Subscribe to our NewsletterGet the latest updates and relevant offers by sharing your email.
Vishal Chawla is a senior tech journalist at Analytics India Magazine and writes about AI, data analytics, cybersecurity, cloud computing, and blockchain. Vishal also hosts AIM's video podcast called Simulated Reality- featuring tech leaders, AI experts, and innovative startups of India.