Bitcoin (BTC-USD) has often been inflated as a way to hedge against inflation or as an alternative Investment class, an opportunity to diversify the portfolio. However, evidence continues to grow, especially in the recent period of market downturn, that cryptocurrency has a strong correlation with stocks (SP500).
This correlation is evidenced by the fact that both bitcoin and stocks are crunching higher in the easy money era in 2020-2021, and both are now facing cyclical deflation as financial conditions tighten and liquidity dries up.
“The correlation between bitcoin and stock indices has remained high and will continue to do so unless bitcoin is widely used as a means of payment — which seems unlikely to happen soon,” Morgan Stanley analyst Sheena Shah wrote in a note on May 10.
For some context, the 120-day trading correlation between the S&P 500 (SP500) and Bitcoin (BTC-USD) was recently at 0.60, the highest reading since the series began in 2011, Charles Schwab, chief investment strategist, wrote, Liz Ann Saunders on Twitter mail May 10 In other words, the movement of bitcoin’s price is similar to the movement of stocks and therefore risky assets. Take a look at the chart below to understand more about how Bitcoin has performed year-over-year with the S&P 500 as well as S&P volatility, which is inversely related to the major stock index.
For the macro perspective, as central banks around the world move toward tighter monetary policy (some more aggressive than others) in an effort to ease inflationary pressures broadly, global money supply growth continues to slow from its peak in February 2021, as Shah noted, adding that Bitcoin (BTC-USD) market cap growth topped a month later in March 2021, which means global liquidity and Bitcoin could share the connection.
Note that in 2020, the price of speculative assets such as bitcoin has risen in the wake of unusually accommodative monetary/fiscal policy and an increase in the money supply. Stifel recently predicted that Bitcoin would reach as low as $15,000 as growth in the M2 money supply, a broad measure of money in circulation, shrinks, “Bitcoin should weaken sharply.”
Looking at Bitcoin’s correlation with stocks from a different perspective, retail investors used to be the dominant cryptocurrency trader about four years ago, but now “the largest percentage of daily crypto trading volumes come from crypto institutions, many of which come from trading with each other.” Shah explained.
She added that this dynamic contributed to the strengthening of Bitcoin (BTC-USD) bonds with equities because these institutions are sensitive to the availability of capital and thus interest rates.
Suspension: “We definitely saw [bitcoin] Trade more in line with stocks and more in line with Nasdaq and tech stocks, in particular, during the last quarter,” Alesia Haas CFO of Coinbase (COIN) for Squawk Box said at CNBC in an interview on May 12. Come to cryptocurrencies, and with the broader volatility we’re seeing, we’ve seen strong correlations.”
Take a look at the bullish trend of the digital SA contributor on Bitcoin.
Earlier last week (May 12) Bill Miller said he had not sold any Bitcoin.