Sep 15, · Bitcoin is popular among investors as a hedge to inflation and tumbling stock prices due to its historically low correlation to equities markets. However, the digital asset is starting to display some uncanny correlation to stocks. BTC and the crypto space as a whole started experiencing losses since the Sep. 3 stock markets meltdown. Aug 25, · A report from Digital Asset Data illustrates (chart attached) that over the past three months, bitcoin has moved in tandem with gold and has swung inversely to moves in the . Jan 03, · The consensus is that the correlation between bitcoin and stocks is weak. In May, Bitwise Asset Management stated that bitcoin’s correlation with bonds was just Bitcoin’s correlation with stocks was even lower, just
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The event disproved the hypothesis that Bitcoin may serve as a safe haven for investors, similar to gold and US treasury bonds during a global equity sell-off.
While many stock market pundits have doubted whether stocks and Bitcoin have any correlation at all, others have said the value of the two asset classes is very much correlated during panicky moments. According to a few experts, cryptocurrencies may be performing a function which more volatile asset classes performed in premature equity markets, like the Dotcom stocks in the 90s, which encompassed various speculative internet stocks.
Market emotion can perform a vital function in circumstances when both more conventional assets like stocks and more new digital assets or cryptocurrencies exhibit meaningful similarities. These situations are often driven by events that drive people to go in aggregate, crowding to or away from individual kind of asset. Throughout , for instance, both assets witnessed striking winnings, followed by a dump in early , and once again, it seemed the two were tracking one other similarly.
This means one thing clearly- the correlation is heavily dependant on the time frame and situation at hand. In the short-term, there are absolutely situations where stocks and the crypto assets like Bitcoin and Ethereum have progressed together, be upwards or downwards. Some analysts have stated that Bitcoin earlier did its own thing as it may not be owned by institutions like all the others are. According to them, BTC is in a macro uptrend since inception and has many many ups and downs along the way.
In the long-term, the correlation between the two is rather weak, according to Bloomberg data compiled by U. One well-known indicator called the Pearson Correlation Coefficient is used often. The coefficient shows how powerful the relationship is in two variables. The coefficient quantifies the linear association between asset prices. If the asset classes are perfectly correlated, then the measurement is 1.
The available proof is inconclusive and, subsequently, the derived results are uncertain. Analysts have cited investor appetite for risk as the main reason to connect both markets. The Volatility Index VIX , which measures and moves in tandem with volatility in equity markets, is inversely correlated with bitcoin price, according to the folks at Deutsche Bank.
They analyzed data from the beginning of December and found that the price of a single bitcoin increased as volatility decreased. Analysts at Morgan Stanley and Wells Fargo reiterated the investor risk theme. At least two of the three analysts above cited institutional investors as a major factor driving correlations between equity markets and cryptocurrency markets. That makes sense when you consider that they account for a major chunk of trading in stock markets. According to a report by Tabb Group, they accounted for as much as 88 percent of overall trading volumes.
That estimate includes high frequency traders. That share can only have gone up with growth of the HFT ecosystem. The entry of institutional investors into the bitcoin ecosystem will likely bring transparency, price stability and liquidity.
More importantly, it will bring a certain amount of predictability to the knee-jerk price movements that have characterized bitcoin markets. But it might be a while before that happens.
Bitcoin and cryptocurrency markets are still largely opaque and dominated by individual traders. Bitcoin futures, introduced on CME and Cboe last year, have failed to draw large traders as evidenced by low trading volumes. There are too few institutional investors equally invested in cryptocurrency markets and equity markets for there to be a sound correlation between the two markets. A correlation of 1 implies synchronicity in price movements. Government regulation might make a difference.
Investing in cryptocurrencies and other Initial Coin Offerings "ICOs" is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions.
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