Bitcoin has been surging for a while along with traditional markets, removing any doubt that the No. one digital currency and the overall crypto market have some correlation with the stock market.
In March 2020, when the Nasdaq, Dow Jones and S&P 500 fell to their one-year lows, bitcoin crashed to $3,800 — it’s one-year low.
When the Federal Reserve announced unlimited money printing to sustain the market, the new money supply and its expectations became the most important factor for both the stock and crypto markets which tend to rise when liquidity is made freely available, Blockchain News reported.
Since then, both the stock and the crypto markets started a bull run. The Nasdaq, Dow Jones and S&P 500 reached record highs, as did ethereum and bitcoin, which reached $19,920.53 according to data-provider Coindesk. As of this writing, bitcoin is trading at $19,374.
Here are five things to know about bitcoin’s risky correlation with big tech, risk assets and the stock market.
Being the de facto world currency, the U.S. dollar is the value benchmark for everything else including assets and other fiat currencies, aka U.S. dollar colonization. Although bitcoin and other crypto can function like currencies such as payments and store of value, the market cap of cryptocurrencies is small compared to traditional finance, and most financial activities are based on fiat money, Blockchain News reported.
In other words, the financial inclusion of cryptocurrencies is not enough. If bitcoin and other crypto replace more traditional financial functions, that may reduce the role of the U.S. dollar and other fiat money, and the relationships between bitcoin and other fiat money will change.
If bitcoin is a safe haven, why has it been tanking when the going gets rough?
The positive correlation between bitcoin and the benchmark S&P 500 stock index means that bitcoin’s price movements are consistent with those in equity markets, Bloomberg reported. When President Donald Trump tested positive for coronavirus in early October, the stock market dropped but bitcoin dropped even further. Gold witnessed a small rally.
The S&P 500 lost 6 percent from its September high, while bitcoin was down about 15 percent since from its mid-August peak. The movement was counter to the often-touted narrative that bitcoin is a haven.
Usually, a safe haven is something of value — most famously, gold — that grows during tough times such as recessions. Since its launch, bitcoin has been defined as a safe haven.
That’s not necessarily true. “Bitcoin isn’t exactly a safe haven asset yet but its monetary policy and its long-term trajectory shows that it’s working its way there,” according to a post by Norwegian Block Exchange (NBE), a cryptocurrency exchange.
Crypto investors say bitcoin is digital gold and should hold a similar place to gold as a reliable fallback in times of crisis. So why did bitcoin fall when times were tough?
Some analysts argue that while bitcoin is highly correlated with traditional equities, it will not be the case forever.
Institutional investors on Wall Street are increasingly moving into and crypto. Bitcoin’s reputation as digital gold got a boost earlier this year when investor Paul Tudor Jones said he was buying it as a hedge against inflation that he sees coming as a result of Federal Reserve and central bank money-printing, Forbes reported.
Payments companies PayPal and Square are both betting on bitcoin.
It’s shortsighted to think that bitcoin can’t be a safe haven because it fell when the U.S. stock market fell in March 2020, NBE reported. That’s because the digital coin has only been around since 2009. Covid-19 is “the first major test of the theory that it’s digital gold and consequently, a better safe haven.” Until covid is over and global markets have “truly rebounded”, it won’t be reasonable to conclude what served as a safe haven during these times.
Technology stocks including Apple, Google, Amazon and Facebook surged during the coronavirus pandemic. Bitcoin outperformed them all including Amazon’s massive 2020 stock price rally and Nasdaq’s increase.
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London-based digital asset management firm CoinShares recommended investors allocate 4 percent of their portfolios to bitcoin, arguing that in its growth phase, it “behaves like a tech stock,” Forbes reported in August.
“As a disruptive technology, bitcoin’s risk profile is rather similar to that of a technology stock: if it reaches its potential, the value could be immense, but at the same time, there is a chance it fails entirely, leaving the value of bitcoins close to zero,” wrote CoinShares’ research strategist James Butterfill.
Gold is still the leading safe-haven asset by a mile with the top cryptocurrency acting as a risk asset, Cryptobriefing reported. The value proposition of bitcoin is that it’s a superior, digital version of gold. “This thesis does hold merit, but the behavior of market participants doesn’t add up.” Bitcoin’s place as a safe haven asset been questioned over and over. Each time, the evidence says the top digital asset is a risk-asset.
Investors don’t buy BTC en masse during times of economic uncertainty, Ashwath Balakrishnan wrote for Cryptobriefing. Since the global market crash of March 2020, bitcoin followed equities closely and cemented its position as a better risk-adjusted play on a post-covid recovery. It does have hedging properties but not the kind that makes it an economic hedge yet.
“Today’s environment is plagued by economic uncertainty, and investors seem to believe this isn’t an ideal situation for bitcoin,” Balakrishnan wrote. “There’s no doubt that the genesis cryptocurrency has a sound thesis rooted in a changing economic system, but the broader market is yet to realize this. Gold is still the foremost safe haven asset without a shadow of a doubt and BTC is a risk-on asset.”