Bitcoin and traditional financial markets have been highly correlated over the past couple of months. This was clearly displayed over the past couple of weeks where the cryptocurrency followed stocks closely.
BTC and S&P 500 Correlation Surging
Data from the cryptocurrency analytics resource skew shows that the realized correlation between Bitcoin’s price and the S&p 500 has surged to a 5-month high. The last time it was at these levels was back in November 2020.
There are plenty of reasons for which this might be the case, but perhaps the most obvious one is the involvement of institutional investors in the cryptocurrency field.
It was reported on numerous occasions that institutional interest in the nascent asset class is surging as big-name companies flooded the market to get their slice of the pie. Grayscale, which is one of the main avenues for smart money to access exposure to BTC’s price without having to worry about custody, saw its asset under management skyrocket over the past few months.
03/03/21 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
— Grayscale (@Grayscale) March 3, 2021
In fact, as CryptoPotato reported earlier in February, the company’s CEO, Michael Sonnenschein, said that institutional interest in Bitcoin is accelerating in 2021.
In any case, there are a few implications of the soaring correlation, and we’re taking a look at whether this is good or bad for bitcoin’s price.
The Bearish Argument
Correlation to stocks indicates a few things, but the most important one is definitely the fact that BTC fails as a hedge against the traditional financial system, in general. If Bitcoin is moving in line with stocks, then it’s not serving as a hedge – something that many proponents are throwing their weight behind.
This has implications on its own. For instance, a few days ago, we reported that one of the reasons for Bitcoin’s recent 25% correction could be the fact that Wall Street went crashing as well. Back then, NASDAQ went through its biggest slump since October 2020. The catalyst was that government bond yields gave the market a jolt, and investors favored companies that would benefit from a broader economic recovery throughout the rest of the year. Speaking on the matter was Peter Tuz, president of Chase Investment Counsel, who said:
“Rates matter. At 1.5%, the yield is comparable to S&P 500 dividend yield. […] And there’s no capital risk with a 10-year, you’ll get your principal back. All of a sudden it’s competitive with stocks.”
In other words, broader macroeconomic events would need to be factored in bitcoin’s price formation in a way where it’s correlated to the stock market. That’s not a situation where investors would want to be in. After all, we saw what happened last March when the coronavirus pandemic was announced, and markets (including Bitcoin) saw one of the worst corrections in history.
The Bullish Argument
Well, as much as it could be bearish, it could also be bearish. Remember, in the case of high correlation, as we pointed out above, broader macroeconomic events would need to be factored in bitcoin’s price formation.
The US House of Representatives passed President Biden’s $1.9 trillion stimulus bill the past weekend. This sent the bill to the Senate for a vote, and if it succeeds, it would be another major injection in the economy. We already saw what the previous ones did to the stock markets.
If bitcoin remains correlated to them, this should favor its price as well.
All in all, a high correlation with legacy markets is unlikely to be considered a good thing in the long term. For bitcoin to act as a hedge, as well as a means of “opting out” of the status quo, it needs to perform completely independently from traditional assets.