Bitcoin and S&P 500 Cointegration has Trillions of Money Dripping Down into BTC
Bitcoin is back to trading around $9,500 after experiencing volatility earlier this week and last week before that. Bitcoin’s losses and gains have been in line with the US stock market which also posted gains on the hopes that the decision by the Federal Reserve to buy corporate bonds would propel a V-shaped recovery.
The US central bank announced that it would buy the lowest investment-grade bonds as part of its QE program to stimulate the economy and save jobs.
Investors are enjoying any bout of positivity, trying not to let the downbeat assessment of the economic impact of the coronavirus pandemic from the US central bank and the International Monetary Fund dampen spirits. Fed Chairman Jerome Powell said to the US Senate,
“Recently, some indicators have pointed to stabilization, and in some areas, a modest rebound in economic activity.”
“That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”
The Chief Economist of the IMF, Gita Gopinath also shared a grim picture of the economy stating, “For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020.”
Institutions are here & so is Bitcoin in risk-on bucket
Despite the recent correction, Gopinath said the equities market had recovered most of its losses since the start of the crisis.
Bitcoin has also recouped the losses and it remains concentrated with S&P 500. But analyst PlanB noted that the performance of bitcoin far outpaced that of equities.
From their March lows, while the S&P 500 jumped nearly 40%, Bitcoin is currently up 150%.
“Current S&P level implies BTC $18K (or S&P to go down),” noted PlanB which is consistent with his S2FX model that puts BTC high at $288,000 which implies S&P 500 at 4300.
“Money printing (QE) pumps both S&P and BTC,” he said.
Short story on #bitcoin – stock market correlation. S&P500 did 2.6x ($1200 -> $3100), BTC 1900x ($5 -> $9500). Bitcoin looks like a high beta stock. Trillions and trillion of central bank QE money, that boost stock markets around the world, seem to be dripping down to bitcoin! 🚀 pic.twitter.com/FNqfwKkoTI
— PlanB 🔴 (@100trillionUSD) June 16, 2020
This cointegration is the result of institutions entering the crypto space. “You wanted the institutions to come. They did, and they put Bitcoin in their risk-on bucket and now we have s&p e-mini 2.0,” said trader cantering Clark. “Should have seen this coming considering the CME has BTC in their equity product group.”
This also puts bitcoin in the risk of another drop if there is a multi-asset sell-off.
Another equity sell-off might not reflect in bitcoin
According to Mati Greenspan, given the initialization of the bitcoin market, this correlation between S&P 500 and Bitcoin could further increase but “a second bout of extreme volatility could potentially break the correlation that was created in March.”
This is because, during the initial shock phase of COVID-19, investors were caught unprepared and they panicked as the global economy went from boom to bust in just a few days.
During the sell-off, everything from stocks, bonds, currencies, to commodities were in losses.
“The correlation between bitcoin and the stocks became so strong that short term traders took notice and began reinforcing it,” Greenspan wrote in his daily newsletter.
But the second time around, investors are expected to be a lot more prepared and institutions have also drafted contingency plans for the next dip.