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Bitcoin Is “Not Immune” to Stock Market Volatility (Cryptocurrency: BTC-USD)

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Bitcoin (BTC-USD) has often been hyped as an inflation hedge or alternative Asset class, a way to diversify a portfolio. However, there is growing evidence, particularly in the recent market downturn, that crypto has a high correlation with stocks (SP500).

This connection is evidenced by the fact that both Bitcoin and stocks have crept higher in the easy money era of 2020-2021 and are now both facing cyclical downturns as financial conditions tighten and liquidity dries up.

“The correlation between bitcoin and stock indices remains high and will continue to do so unless bitcoin becomes widely used as a means of payment – which is unlikely to happen any time soon,” wrote Morgan Stanley analyst Sheena Shah. in a statement dated May 10.

For some context, the rolling 120-day correlation between the S&P 500 index (SP500) and Bitcoin (BTC-USD) recently stood at 0.60, the highest since the series began in 2011, wrote Charles Schwab Chief Investment Strategist Liz Ann Sonders in a May 10 Twitter post. In other words, Bitcoin’s price action is similar to that of stocks and therefore risky assets. Take a look at the chart below to better understand how Bitcoin Y/Y has performed against the S&P 500 as well as S&P volatility, which is inversely correlated with the main stock index.

From a macroeconomic perspective, global monetary growth continues to decelerate from its February 2021 peak as central banks around the world turn to tighter monetary policies (some more aggressively than others) to dampen widespread inflationary pressures, Shah noted: Bitcoin (BTC-USD) market cap growth peaked a month later in March 2021, suggesting that global liquidity and Bitcoin may have a connection.

Note that speculative assets like Bitcoin have risen in price in 2020 on the back of exceptionally accommodative monetary/fiscal policies and the increasing money supply. Stifel recently predicted that Bitcoin will reach as high as $15,000 as shrinking growth in the M2 money supply, a broad measure of money in circulation, “should severely weaken Bitcoin.”

Looking at BTC-stock correlation from a different perspective, retail traders were the dominant cryptocurrency trader around four years ago, but now “the largest share of daily crypto trading volume comes from crypto institutions, from which a majority of them originate which they trade each other,” explained Shah.

These dynamics have contributed to bitcoin’s (BTC-USD) strong peg to equities, as these institutions are sensitive to the availability of capital and therefore interest rates, she added.

Comment: “We definitely saw [bitcoin] Trade more in line with stocks and more in line with Nasdaq and especially technology stocks over the last few quarters,” Coinbase (COIN) CFO Alesia Haas said in an interview with CNBC’s Squawk Box on May 12. “There’s a lot of institutional money coming into crypto, and with the broader volatility that we’re seeing, we’ve seen strong correlations,” she added.

Take a look at The Digital Trend’s bullish view on Bitcoin from SA Contributor.

Earlier last week (May 12), Bill Miller said he had not sold any bitcoins.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers

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