Bitcoin’s Correlation with Stocks Still Elevated, Most Likely to Increase Further
Bitcoin is up over 31% YTD while trading around $9,650 but its correlation with the stock markets is still elevated.
The correlation first climbed to new highs during the March sell-off. But while the US stocks and bitcoin are still correlated, the percentage of movement is not.
Bitcoin’s correlation to the S&P 500 is currently reading just under 0.5. Despite being an extremely high figure for the bitcoin market, “it still does not indicate a particularly significant relationship,” wrote analyst Mati Greenspan in his Quantum Economics newsletter.
For starters, it is nowhere near the level it was at the start of the crisis. The Bitcoin market has also seen increasing involvement from institutional players as seen in the volume and the introduction of new structured products hedge funds can use to access the market.
As such, “the more big money is involved, the more managers of large portfolios will see it within the context of the traditional markets and use it as a tool to hedge their investments, which seems most likely to only increase the correlation from here,” he said.
Moreover, when it comes to ROI which unlike price is adjusted by risk the asset is exposed to, Bitcoin is leading among stocks and gold. The higher the ROI the better and Bitcoin wins it with higher returns at all times compared to the others.
Over the last month bitcoin markets have been behaving irregularly. In May, macro investor Paul Tudor Jones jumped in Bitcoin right after the digital currency went through its third halving. The same month Goldman Sachs had a client call where they said bitcoin is not an asset class and they do not recommend it as a suitable investment to its clients.
Despite all this, bitcoin did its own thing and ended the month at $10,000, up from the opening price of $8,800.
“The assessment that bitcoin price remains uncorrelated, even with splashy industry news is mostly accurate,” said Michael Moro, CEO of Genesis Capital.
Interestingly, the month of May also saw the largest amount of US bankruptcy filings since 2009, the Great Recession.
About 27 companies reported at least $50 million in liabilities sought court protection from creditors. Year-to-date is another highest since 2009 with 98 bankruptcies filed by companies.
The turmoil in the global markets and economies may be motivating more people to explore digital currencies, according to Catherine Coley, CEO of Binance.US.
“As we are all stuck at home, more stimulus packages are being sent out through USD while digital currencies, like BTC, untied to the traditional banking system, appear more attractive as Americans look for additional ways to build their financial health and diversify their assets,” she said.
In the coming week, the US Federal Reserve's two-day meeting is a big event for markets with more details on stimulus and a possible new program expected.