Bitcoin (BTC-USD) has often been touted as an inflation hedge or alternative investment class, an opportunity to diversify a portfolio. However, evidence continues to mount, especially during the recent market downturn, that crypto is highly correlated to stocks (SP500).
This link is evidenced by the fact that bitcoin and stocks rose in the easy money era of 2020-2021, and now both face cyclical downturns 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 becomes widely used as a form of payment – which is unlikely to happen soon,” analyst Sheena Shah wrote. at Morgan Stanley, in a May 10 memo.
In some context, the rolling 120-day correlation between the S&P 500 (SP500) and bitcoin (BTC-USD) recently stood at 0.60, the highest reading since the series began in 2011. wrote Liz Ann Sonders, Charles Schwab’s chief investment strategist. in a Twitter Publish May 10. In other words, the price action of bitcoin resembles that of stocks and therefore risk assets. Take a look at the chart below to better understand how bitcoin fared Y/Y with the S&P 500 as well as S&P volatility, which is inversely correlated with the major stock index.
From a macroeconomic perspective, as central banks around the world turn to tighter monetary policy (some more aggressive than others) in an effort to ease widespread inflationary pressures, global money supply growth continues to decline. slowing from its peak in February 2021, Shah noted, adding that bitcoin (BTC-USD) market capitalization growth exceeded a month later in March 2021, implying that global liquidity and bitcoin could share a connection.
Note that in 2020, speculative assets like bitcoin soared in the wake of extraordinary accommodative monetary/fiscal policy and increased money supply. Stifel recently predicted that bitcoin would hit $15,000 as declining growth in M2 money supply, a large measure of money in circulation, “is expected to significantly weaken bitcoin.”
Looking at the BTC-equity correlation from a different perspective, retail investors were the primary cryptocurrency trader about four years ago, but now “the largest proportion of daily crypto trading volumes come from crypto, much of which comes from them trading with each other,” Shah explained.
This dynamic has contributed to bitcoin’s (BTC-USD) strong link to equities since these institutions are sensitive to the availability of capital and therefore interest rates, she added.
Remark“We have certainly seen [bitcoin] trade more in line with stocks and more in line with Nasdaq and tech stocks, especially in the last quarter,” Alesia Haas, chief financial officer of Coinbase (COIN), told CNBC’s Squawk Box in an interview on Tuesday. May 12. “A lot of institutional money has been going into crypto, and with the broader volatility we are seeing, we have seen strong correlations,” she added.
Take a look at contributor SA’s bullish view on The Digital Trend on bitcoin.
Earlier last week (May 12), Bill Miller said he hadn’t sold any bitcoin.