Nick Chong · 2 days ago · 2 min read
Bitcoin is an uncorrelated asset no longer.
Since the start of the pandemic, the crypto market has become closely correlated with the movements of the S&P 500 and other global markets.
There is no better example of this than Bitcoin’s crash on Mar. 12 and 13. During those historic two days, BTC plunged by 50 percent as U.S. stocks experienced some of their worst performances in history.
The correlation hasn’t gone unnoticed.
As reported by CryptoSlate, JPMorgan analysts said in a report published in June that since the March crash, “Cryptocurrencies have traded more like risky assets like equities—a significant change relative to the prior couple of years.”
Even Bitcoin bulls have admitted the existence of a correlation, which is directly in conflict with the long-held narrative that cryptocurrencies are entirely uncorrelated from stocks, bonds, and real estate.
The silver lining to the correlation between the S&P 500 and Bitcoin
“The stock-crypto correlation is the most annoying thing from a portfolio PoV. Diminishes the marginal benefit of owning stocks. Maybe should dump stocks and just hold gold+BTC.”
He added that those trying to use the correlation as a reason to dump Bitcoin and buy more stocks should be thinking the other way around. Qiao attributed this to his belief that once “inflation goes through the roof,” stocks will be destroyed while BTC may be able to outperform.
This isn’t the only silver lining.
Pseudonymous Bitcoin quantitative analyst “PlanB” wrote that BTC trading exactly like the stock market is extremely bullish because the Federal Reserve is supporting the S&P 500 with everything they have. That’s to say, the crypto market indirectly has the support of the Federal Reserve.
“Yes FED tried to stop QE in Nov 2018, the effect on S&P and BTC were similarly disastrous. FED will never do that again. IMO there is no turning back, it is QEternity,” the analyst wrote in reference to the Federal Reserve’s recent policies.
“Don’t Fight the FED” is old Wall Street wisdom.
Great thing that #Bitcoin is fully aligned with FED interests (QE to save banks & companies). BTC is correlated (95% R2) and cointegrated with US equities (S&P500). So BTC is not an uncorrelated asset and supported by FED actions. pic.twitter.com/xYaFLS3Wl0
— PlanB 🔴 (@100trillionUSD) June 21, 2020
What’s the cause of the correlation?
Bullish implications of the Bitcoin and S&P 500 correlation aside, it’s worth taking a look at what is causing this weird market phenomenon.
According to the pseudonymous trader “Trajan,” also known as “Split Capital,” the likely cause of the correlation is the lack of liquidity in the market.
“It comes from an overall thin market. Derivatives are doing record low volumes and generally haven’t recovered any of their open interest as a whole. Coinbase daily volume is ~$80m on most days and BitMEX is getting dragged around by it (which drags around the other derivs).”
Bitcoin’s capitulation event wiped out many market makers and funds while making many investors hesitant to trade, hence the relative lack of liquidity.