The Bitcoin and Stock Market Correlation? Never Heard of It!

How is it that the US equities market, a bastion of stability and trust, started behaving like an illiquid junk asset or volatile EM segment? Some traders and experts are asking questions and drawing parallels to the momentum within the cryptocurrency industry.

What is an asset correlation?

Without going into a great deal of detailed explanation, correlation shows how strong the relationship is between two or more parameters, and how much a change in one parameter influences the other. Basically, it is generally accepted that financial assets and macroeconomic factors do not exist in isolation. They are interwound and interconnected with myriads of cause-and-effect relations. This means that a change in one asset class inevitably leads to a domino effect or a series of adjustments in other asset classes. However, the correlation value may vary for different assets. For example, a sell-off of cacao futures won’t lead to major events on the oil market. But a weakening dollar will be felt nearly everywhere, from the stock market to the global economy.

How do cryptocurrencies fit in?

The nature and the perception of cryptocurrencies’ correlation with other financial assets have changed over time. In the early days of Bitcoin, many traders and crypto enthusiasts hoped that it would become a digital safe haven due to the lack of correlation with traditional assets and immunity to macroeconomic factors. Buying and holding Bitcoin for the long term, they built a culture of HODLing. However, in 2017 and most of 2018, the charts for Bitcoin and US stock markets, including Dow Jones and S&P 500, started to look spookily similar. People started asking questions about whether these two vastly different classes of assets influenced each other and to what degree.

Two parallel worlds

Cryptos and stocks may rise and fall in unison at times, but these asset classes are from different worlds and their movement are not correlated in a fundamental way. That’s the opinion shared by major cryptocurrency experts, including Eric Ervin, the CEO of the U.S.-based asset manager Blockforce Capital, and Anthony Pompliano, head and the founder of Morgan Creek Digital Assets. In the recent interview with CNBC, Pompliano explained that the Bitcoin sell-off is not related in with the epic collapse of FAANG stocks (the abbreviation for the Big Five of the most valuable hi-tech companies Facebook, Apple, Amazon, Netflix, and Google). He pointed out zero correlation between S&P500 and digital assets over the last 108 days. The Blockforce analysis supports this view. The experts of the company looked at the price movements of Bitcoin and S&P 500 from Jan 2015 to Oct 2018 and discovered that their interdependence measured by a correlation coefficient was insignificant. It means that, contrary to common belief, these two asset classes do not influence each other in any meaningful way. While experts admit that there are some psychological components that may affect the price momentum, there is no fundamental reason to tie up the developments at those two markets that play by their own rules. Do you think Bitcoin and tech stocks are correlated? Is it wise to buy Bitcoin to hedge against stock market sell-off? Let us know what you think in the comments below.