- Bitcoin (BTC) has been cataloged as the ‘digital gold’, that is, as a refuge of value in periods of inflation and uncertainty.
- The price of Bitcoin currently behaves similar to a risk asset, not a safe haven.
- The price of Bitcoin could be decoupling from the stock market due to the sanctions imposed on Russia.
Throughout its history, the price of Bitcoin (BTC) has been impacted by a set of factors, however, this is not an exclusive phenomenon for Bitcoin.
The BTC was born in 2008 in the midst of a global economic crisis, which caused a deep distrust in financial institutions that belong to the traditional financial, economic and monetary system.
In this way, the correlation of the price of Bitcoin with the traditional stock market is a relevant element for some. Especially when faced with the question: Does the correlation between the stock market and Bitcoin indicate that crypto could become another investment vehicle within the financial system it was intended to replace?
Below you will find an explanation of the factors that affect the price of Bitcoin and its possible correlation with the stock market.
Is Bitcoin digital gold?
Gold has been considered throughout human history as the default safe haven in times of crisis. and of course it is so in the stock market era as well.
Why? Well, given its negative correlation with this, that is, when the stock market crashes, gold keeps money safe and even experience a revaluation. Therefore, since the birth of Bitcoin, many experts have considered the leading crypto as the ‘digital gold’. That is, an asset that offers refuge to money against possible economic crises.
The question is: Does BTC really fulfill this role?
What factors influence the price of BTC?
One of the key features of Bitcoin is its immutable scarcity. Therefore, the law of supply and demand are key to understanding the fluctuations in the price of the first cryptocurrency of humanity. Unlike fiat money, the supply of Bitcoin is known to all and has a maximum of 21 million BTC, not one more and not one less.
As the demand for Bitcoin increases, with an increasingly reduced supply, it would tend to generate upward pressure on its price. It is precisely for this reason that every time there is an institutional adoption, the crypto community sees it as a bullish sign, since its demand is increasing and its total supply is not.
However, the law of supply and demand works the same for both rising and falling prices. If the pressures are to sell, the price of Bitcoin will tend to decrease.
So, considering that supply is limited, we must understand how the demand for Bitcoin works and what factors influence it:
- The news associated with the increase in institutional adoption put pressure on the increase in demand.
- The regulation of cryptocurrencies. Changes in regulation can encourage or discourage investment in Bitcoin.
- News indirectly linked to Bitcoin.
- Global news sentiment has a huge impact on crypto market sentiment.
In this way, Bitcoin, like other commodities such as oil, derives much of its value from limited supply and growing demand, especially during periods of heightened inflation and uncertainty. However, Bitcoin differs from these other asset classes in its volatility and tendency to be driven by news.
Bitcoin correlation with the stock market
According to a report by the International Monetary Fund (IMF), Before the pandemic, cryptocurrencies showed little correlation with major stock indices.
Before looking into what the correlation coefficient is between Bitcoin and the stock market, it is important to understand that this coefficient is a number between -1 and 1.
Therefore, the closer it is to -1, the stronger the negative correlation, i.e. the price of Bitcoin moves in the opposite direction to the stock. Whereas, the closer to 1, the stronger the positive correlation between assets, meaning that the Bitcoin price tends to move in the same direction as the stock price.
Thus, according to the IMF, during the period of 2017 – 2019, the correlation coefficient between the movement of Bitcoin and the S&P 500, the benchmark stock market index for the United States, it was only 0.01. However, everything changes in 2020 as the pandemic unleashes a greater appetite for risk among investors.
For the period of 2020 – 2021, the correlation between both assets was 0.36, that is, they began to tend to move in the same direction. Likewise, in In January of this year, Kaiko revealed that Bitcoin reached its highest correlation with the S&P 500 and Nasdaq since July 2020 at 0.61 and 0.58, respectively.
In fact, according to data from IntoTheBlock, currently the correlation between Bitcoin and the S&P 500 is 0.74, and as can be seen in the following graph, during the last year the correlation between both asset classes has been mostly positive, with some exceptions.
Bitcoin and its correlation with gold
As expected, as the positive correlation between Bitcoin and the stock market increases, its correlation with gold decreases, or in other words decouples.
In fact, according to IntoTheBlockthe correlation of Bitcoin and precious metals has fallen to its lowest level since August 2021. Specifically, according to the data, the correlation between Bitcoin and gold is currently -0.51.
A curious fact is that the highest positive correlation between BTC and gold has been 0.8 in July 2019.
Thus, as the 30-day charts of the Sharpe Ratio and the Sortino Ratio show, commodities such as gold and silver have managed to be havens in this period of economic and political instability.
The Sharpe Ratio is an index that measures the average return obtained above the risk-free rate per unit of volatility. This index adjusts a portfolio’s past return, or expected future return, for excess risk.
A high Sharpe ratio is good compared to similar portfolios with lower returns.
Whereas the Sortino ratio is a variation of the Sharpe Ratio and takes the return on an asset and subtracts the risk-free rate, then divides that amount by the asset’s downside bias.
Bitcoin decoupling?
According to an analysis of Barron’s, Bitcoin price could be decoupling from the stock market due to sanctions imposed on Russia.
Last week, the price of Bitcoin had seen an increase of almost 15% in 30 days. Based on this, analysts saw the possibility of Bitcoin decoupling from the stock market to be a haven against market uncertainty. The decoupling of Bitcoin and equities could revive the promise of cryptocurrencies as a hedge.
Despite this, according to BlockWorks, Derek Lim of Bybit warned at the time that this decoupling between BTC and the stock market that was being observed was not clear if it was just a short-term fact.
The topic became a topic of debate on social networks. Analyst Matthew Hyland explained that;
“If Bitcoin weren’t correlated to the stock market, it would be performing like gold has since December.” and I add “Bitcoin is correlated with the Stock Market. It has not been ‘decoupled’. Maybe one day it will decouple, but until it happens, you can’t conclude that it has or will.”
Why Bitcoin Correlation Matters?
Again, in theory, Bitcoin and cryptocurrencies in general were created as an alternative to a broken financial system, so the question everyone is asking is, if so, why is the cryptocurrency market in the red?
Namely, The world is currently in a situation of uncertainty, marked by the inflation of the US dollar, the clear reminder that governments are the real owners of your money and can do with it what they want and a possible Third World War. Shouldn’t cryptocurrencies be shining?
Michael Saylor, CEO of MicroStrategy, explained on Twitter that the reason why cryptocurrencies are not shining right now is because of the conflicting investment profiles in Bitcoin.
Saylor seems to believe that there is a large amount of capital invested in Bitcoin that is governed by the stock market. Therefore, they are investors who act in the crypto market in the same way that they do in the stock market.
“There is a tension between conventional traders who see Bitcoin as something to buy or sell depending on their current risk assessment and interest rate expectations, and fundamental investors who simply want to buy it all and hold it forever.”, wrote.
Consequently, Saylor assures that the status quo will at some point be broken and, from then on, Bitcoin will be able to fulfill its function as a long-term investment.
“Over time, HODLers will win”, Saylor emphasizes, that is, those investors who maintain their investment in Bitcoin or another cryptocurrency despite market movements.
The correlation of the price of Bitcoin with other asset classes offers a perspective on the state of the market. In other words, the fact that crypto is currently correlated with the stock market suggests that investors are not seeing it as a value haven, but as a risk asset.
Therefore, it can be expected that those factors that negatively affect the stock market, especially the S&P 500, will also impact the price of Bitcoin in the same way.
Even so, the correlation of Bitcoin with other asset classes is an indicator that we must follow very closely because, as seen on historical charts, they tend to change.
You might be interested in: