Bitcoin (BTC-USD) has often been publicized as a hedge of inflation or as an alternative investment class, opportunity for portfolio diversification. However, there is growing evidence, especially in the recent market downturn, that cryptocurrencies have a high correlation with equities (SP500).
This connection is evidenced by the fact that both bitcoin and equities in the era of easy money-making sharpened higher in 2020-2021 and are now facing 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 means of payment – which seems unlikely to happen soon,” Morgan Stanley analyst Sheena Shah wrote in a 10th note.
In some contexts, the 120-day sliding correlation between the S&P 500 (SP500) and bitcoin (BTC-USD) was recently at 0.60, the highest value since the beginning of the series in 2011, wrote Chief Investment Strategist Charles Schwab Liz Ann Sonders. on Twitter post 10 May. In other words, the price action of bitcoin is similar to the action of stocks and therefore risky assets. Take a look at the chart below to better understand how bitcoin performed year on year with the S&P 500 index and also with S&P volatility, which indirectly correlates with the main stock index.
From a macroeconomic point of view, as central banks around the world move to tighter monetary policy (some more aggressive than others) in an effort to dampen widespread inflationary pressures, global money growth continues to slow from its peak in February 2021, Shah noted. He added that the growth in market capitalization of bitcoins (BTC-USD) peaked a month later in March 2021, suggesting that global liquidity and bitcoin may share a link.
Note that the price of speculative assets, such as bitcoin, rose in 2020 as a result of extraordinary accommodative monetary / fiscal policies and a sharp rise in the money supply. Stifel recently predicted that bitcoin would reach as much as $ 15,000 because the declining growth of the M2 money supply, a broad measure of money in circulation, “should sharply weaken bitcoin.”
Looking at the correlation between BTC and other optics, retail investors used to be the dominant cryptocurrency trader about four years ago, but now “the largest share of daily cryptocurrency trading comes from crypto-institutions, much of which comes from cryptocurrency trading. each other, “Shah explained.
This dynamic contributed to the strong bond of bitcoin (BTC-USD) to stocks, as these institutions are sensitive to the availability of capital, and therefore interest rates, she added.
Comment: “We must have seen [bitcoin] trade more in line with stocks and more in line with Nasdaq and technology stocks, especially in the last few quarters, ”Coinbase (COIN) CFO Alesia Haas told CNBC’s Squawk Box in an interview on May 12. “A lot of institutional money has entered the cryptocurrencies, and with the wider volatility we see, we have seen strong correlations,” she added.
Take a look at the bull’s-eye view of SA’s Digital Trend contributor’s bitcoins.
Earlier last week (May 12), Bill Miller said he had not sold any bitcoin.