Monday, November 29

Bitcoin’s correlation with S&P 500 stocks rises

Key facts:
  • The price of bitcoin is increasingly responding to regulatory decisions.

  • While bitcoin shows a 99.56% return in 2021, the S&P 500 has appreciated 23.4%.

The evolution of the price of bitcoin (BTC) has been increasingly coupled to the behavior of Wall Street stocks, says a report by Coin Metrics. Specifically, the correlation between the price of BTC and the Standard & Poor’s 500 (S&P 500) index has grown from 8% at the beginning of July this year, to 38% at the present time, according to Coin Metrics.

From a peak of 48% recorded in March 2020, the correlation between bitcoin and the S&P 500 had registered a sustained decline from late 2020 to early July 2021, notes the report of the analytical company.

The graph below depicts bitcoin’s correlation with the S&P 500 index, which is fairly representative of conventional company stocks. This correlation reached its historical maximum in 2020, of 48%, after the declaration of a pandemic, in mid-March of that year.

Correlation between bitcoin and S&P 500 from January 2017 to the present. Source: Coin Metrics.

It can be seen that much of the year 2018, when the price of bitcoin decreased by 80%, the correlation with the S&P 500 becomes negative, which indicates an opposite or discordant behavior with respect to bitcoin of this stock index.

In the following graph, the evolution of BTCUSD and S&P 500 can be followed in detail and will be found the coincidences between the evolution of the two curves when there is a positive correlation, or movements that differ in the case of low correlation or negative correlation. For example, in mid-March 2020, all markets fell simultaneously, and it is precisely where the historical maximum of the correlation between both assets occurs.

Bitcoin and S & P500 prices from 2017 to present. Source: TradingView.

Before 2020, the correlation of bitcoin with traditional stocks remained below 20% or even negative values, implying an almost total decoupling between those two categories of financial products.

Bitcoin, more sensitive to regulatory decisions

The fact that the correlation with the S&P 500 is growing in recent months means that bitcoin is more sensitive to the decisions of the US Federal Reserve (Fed) and other regulators. However, when the return of the bitcoin price is compared to the return of the stocks represented in the S&P 500 index, this looks considerably smaller compared to the first cryptocurrency.

Compared to the beginning of the year, bitcoin has appreciated almost 100%, while the S&P 500 has an appreciation four times less, of 23%. If we make the comparison since 2017, in the same range of the last graph, S&P 500 has appreciated 98.30% in a little less than five years, while bitcoin has appreciated 4.630% in the same period, in figures provided by TradingView .

Bitcoin also shows a growing correlation with gold this year, although the precious metal appreciated less. However, gold is the one that comes closest to the appreciation of bitcoin in the period 2017-2021, with a 3,000% boom in its price, according to TradingView. A year ago, a decoupling between gold and bitcoin was observed, as reported by CriptoNoticias on November 26, 2020.

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