BTC was an uncorrelated advantage, but that is no longer true. What can gold and stocks suggest regarding the crypto markets?
For much of Bitcoin’s lifetime, it existed as something of value to a tiny group of individuals. Now, demand and awareness are accelerating quickly. So, what does this mean for the status of BTC as a supposedly uncorrelated asset?
That Bitcoin has been an uncorrelated asset is not only conjecture — the numbers back up it. Based on statistics accumulated by VanEck in early 2021, there was almost no discernible pattern between the moves of Bitcoin and other markets, including S&P 500, bonds, gold, real estate and others, for the period 2013 into 2019.
But as the graph below shows, there has been an evident shift in significance patterns across different asset categories since 2020, most notably, the stock markets and gold.
Additional based on statistics compiled by Singaporean bank DBS, Bitcoin’s significance to the stock markets continues to increase during 2021.
It is worth noting that Bitcoin’s increasing correlation with both stocks and gold is not an anomaly. These markets are usually considered to have an inverse relationship due to gold’s standing as a hedging tool during times of stock market volatility. However, no doubt in part thanks to the market turmoil caused by macroeconomic variables, both gold and stocks have been in normally bullish markets for many of 2020 and 2021.
This pattern describes how BTC can show a correlation to both resources. On the other hand, the storyline that Bitcoin could be closely connected to gold seems to be on increasingly shaky ground.
To start with, this concept was only ever dependent on the belief that investors can treat BTC as a store of value in case of a larger market downturn, affording it the same”safe haven” status as gold. However, for much of Bitcoin’s life, it had existed during times of economic prosperity, at least at the advanced economies, so the theory had never been tested.
Not digital gold?
TD Ameritrade analyst Oliver Renick has argued that BTC is much more correlated to macroeconomic occasions than gold. The Goldman Sachs head of commodities research recently went on record to state which Bitcoin is similar to”digital copper” than digital gold. His position is that Bitcoin behaves more like aluminum as a”risk-on” advantage, whereas gold functions as a”risk-off” hedge.
Additionally, gold’s price tends to grow when other assets depreciate, and Bitcoin doesn’t reveal such a steady up-down trend.”
However, it may not necessarily be a positive development for volatility-seekers if Bitcoin does take on gold-like properties because its trading possible will certainly decrease.
Recently, market demand appeared to indicate a more negative correlation between Bitcoin and gold. The May sell-off in the crypto markets could have prompted fleeing investors to select a yellowish metal buying spree.
Bitcoin’s correlation with the stock markets appears to be taking another turn. Events over the previous 18 months or so have given additional credence to the argument that Bitcoin is correlated to the stock markets and the bond might be getting more powerful. In March 2020, when the stock markets started to drop amid widespread doubt regarding COVID-19, that a cryptocurrency Black Thursday promptly followed.
More lately, Bitcoin’s volatile price action could be connected with investor uncertainty regarding tech stocks. Barry Silbert has additionally tweeted his belief that the crypto markets have been connected to stocks.
What is tying BTC to stock prices?
There are lots of factors describing why Bitcoin seems to be tied to the stock markets. First, the meme stocks motion that started with GameStop in February, and much more recently reemerged around AMC shares, has generated waves in the area of stock trading. The development of a new production of digital-savvy investors who bridge the gap between crypto and stocks may clarify why there’s a growing correlation between the two assets.
But, another crucial factor must be the inflow of institutional funds into crypto. Though the”uncorrelated” debate held water while crypto has been dominated by retail investors, it’s increasingly no longer the situation. Logically, if it gets to a point where both markets consist of the same participants, the correlation becomes inevitable.
This pattern of correlation makes sense if drilling into the correlation information to the level of indicators or even individual stocks. While Bitcoin’s correlation using all the S&P 500 and Nasdaq indicators is comparatively low at 0.2, Bitcoin-invested firms show a much higher correlation, together with Tesla around 0.55, MicroStrategy over 0.7, and Grayscale’s Bitcoin Trust above 0.8.
Extrapolating what this might mean if the institutional trend continues, it appears plausible that Bitcoin’s correlation to the stock exchange will continue to increase so long as firms want to hold BTC in their balance sheets. But, Igneus Terrenus, head of communication at Bybit Exchange, considers that it will Have Quite a While before that happens, telling Cointelegraph:
“Things might very well change in the long run when institutional adoption actually kicks in to gear, and much more of the 40,000-plus public traded firms begin to place BTC on their balance sheet. But at the present time, most institutional investors are utilizing Bitcoin as a diversifier in their portfolio. We’re yet to find any major indication of convergence in price moves.”
A two-way relationship
Correlation is not causation, and Bitcoin’s relationship with the stock exchange is not one-way. While events in the stock markets can cause BTC market motions, could the reverse also be authentic? It seems likely, particularly as institutional interest in BTC continues. Even the flagship cryptocurrency would be exposed to macroeconomic variables than it was through its cypherpunk days.
However, Bitcoin has its own market forces at play, and these could ultimately influence the worldwide stock markets in the event the worth of corporate balance sheets varies. For instance, Bitcoin’s halving events have a persuasive link with its cost cycles.
“The principal actors involved with crypto’s market lively are dealers, so the introduction of institutional investors might dampen volatility, but I suspect the powerful cyclical patterns present right now in Bitcoin’s cost formation will override any forces of correlation with different markets.”
Additionally, it is worth mentioning that externalities, for example electricity costs, availability and price of mining equipment, and regulatory developments all affect Bitcoin’s cost.
Therefore, it appears improbable that lots of firms would adopt the identical enthusiastic attitude to BTC investing as MicroStrategy and would probably take a more prudent and diversified path should they invest in crypto.
What about altcoins?
Another fascinating consideration is what would happen to the rest of the cryptocurrency markets ought to Bitcoin be closely tied into the stock markets. So far, the crypto markets generally accompany Bitcoin’s lead, even though there may be odd exceptions.
However, institutional interest in cryptocurrencies does not necessarily extend quite far down the crypto tables. Therefore, would it be possible to see a future where price moves in altcoin markets are far less connected with Bitcoin, thanks to an investor base split between people and institutions?