Is Bitcoin's price movement related to stocks and gold?

Over the years, Bitcoin's positioning has been changing and is now controversial. It has been regarded as electronic cash or digital gold that resists censorship, and it has also been regarded as an anonymous currency specifically for dark web services. In short, Bitcoin plays different roles at different times.

When it comes to Bitcoin as an investment or a store of value, there are two very controversial views:

• Bitcoin is an asset that is not correlated with traditional finance

• Bitcoin is a safe haven asset

Currently, the analysis of these two points on the market often lacks data support. The following article will analyze the real correlation between Bitcoin and stocks and gold based on real data to test the above two popular statements.

Analytical methods:

To calculate correlations, we first calculate the log returns of each asset class and then calculate the Pearson correlation coefficient for the specified time period. Since the cryptocurrency market never closes and the stock market closes at night and on weekends, we exclude Bitcoin data after the stock market closes. This helps to eliminate noise, but the side effect is that some correlations are exaggerated.

1. Not related to traditional finance

When considering Bitcoin as an investment option, it is important to analyze whether it is correlated with other financial assets. If Bitcoin has a low correlation with traditional financial assets such as stocks, it can be an effective tool for diversifying investment portfolios.

The stock market is very complex, and it is difficult to fully analyze the true correlation between Bitcoin and stocks. A relatively simple method is to compare the correlation between BTC and the S&P 500 index, which is an important indicator of the entire US stock market.

Historically, Bitcoin has not been correlated with the S&P 500. Since 2012, the correlation between Bitcoin and the S&P 500 has generally remained between 0.15 and -0.15, meaning there is almost no correlation. But over the past month, Bitcoin's correlation with the S&P 500 has suddenly risen to a record high.

Zooming in, we see that the correlation peaked on Black Thursday (March 12), when both cryptocurrencies and stocks experienced historic, sudden plunges. By the end of March, the correlation had fallen back to normal levels. But since then, the correlation has started to climb again.

Does this mean that Bitcoin and the S&P 500 are suddenly now correlated?

Probably not. Although the correlation did increase in the short term, it was generated in a very special market environment. As the new coronavirus spread around the world after March 12, investors around the world suddenly began to rush to cash out and sell assets collectively. Therefore, on March 12, the correlation between most financial assets rose sharply.

For example, the correlation between SPY and GLD (spot gold) has suddenly spiked to its highest level since 2013. This could be due to a broad sell-off caused by a liquidity crunch due to the virus.

Over the past year, the correlation between Bitcoin and the S&P 500 has been close to zero. The chart below shows the correlation over the past 365 days. It is relatively concentrated around 0, with a mean of -0.0075. This shows that under normal market conditions, the correlation between Bitcoin and the S&P 500 is not significant.

Last month, Bitcoin's fundamentals did not change, but the outside world changed dramatically. In the long run, the correlation between Bitcoin and the S&P 500 will return to the mean - close to zero. But in the short term, or when the liquidity crisis remains, the two markets may still have a relatively high correlation because the global situation is affecting both markets.

2. Safe-haven assets

A common view: Bitcoin is a safe haven asset. Generally speaking, a safe haven is an asset that is expected to maintain or increase in value during periods of market turmoil. Traditionally, gold is considered the first choice for safe haven assets. In times of turmoil, gold prices tend to rise relative to other assets.

Historically, Bitcoin and gold have not had a strong correlation. But Bitcoin’s correlation with gold also suddenly strengthened in March, similar to Bitcoin’s correlation with the S&P 500.

On March 12, gold saw a massive sell-off, just like other assets. As both Bitcoin and gold prices fell, the correlation between the two rose (even though both prices were falling, the correlation was rising because both assets were moving in the same direction). Interestingly, they have remained highly correlated since then.

Although Bitcoin and gold may not be safe havens during a global liquidity crisis, they can still be considered safe havens during times of increasing monetary inflation and quantitative easing. With the recent $2 trillion injection into the market by the Federal Reserve and the global economy entering an unprecedented period of uncertainty, Bitcoin can be a relatively safe haven, but this may change at any time in the future. Given the complex factors of the global epidemic, it is difficult to draw a conclusion now.

The correlation between Bitcoin and gold showed similar signs of growth earlier in 2020. In January, as military tensions between the United States and Iran escalated, Bitcoin and gold prices both rose and the correlation strengthened. This suggests that Bitcoin can temporarily serve as a safe-haven asset similar to gold.

However, overall, the correlation between Bitcoin and gold is still weak. The figure below shows the correlation distribution of Bitcoin and gold over the past year. It is also concentrated around 0, with a mean of 0.1194, slightly higher than the mean of the Bitcoin/S&P 500 correlation distribution.

Generally speaking, if Bitcoin is used as a safe haven during inflation, then its price should rise as inflation rises (and vice versa). The chart below shows the correlation between BTC and the St. Louis Federal Reserve’s 5-year forward inflation expectations rate (T5YIFR). Interestingly, on March 12, as the Fed took quick action, Bitcoin’s correlation with T5YIFR also rose sharply.

Conclusion:

Historically, Bitcoin has not been highly correlated with stocks or gold. Although Bitcoin and stock correlations have recently reached all-time highs, it is difficult for this relationship to maintain over the long term.

The world is currently affected by the epidemic, and there is still uncertainty about Bitcoin in the short term, but if central banks around the world continue to inject funds into the economy at an unprecedented level, then this period will also become a turning point for Bitcoin.