Bitcoin Swings Affect Broader Market, No Longer a ‘Fringe Asset’

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In Brief
  • In an analysis, Singapore banking giant DBS said that bitcoin was no longer a “fringe asset.”

  • The analysis looked at how correlated different assets had become recently, including bitcoin.

  • According to DBS, bitcoin has begun to affect other markets as well.

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In an analysis, Singapore banking giant DBS said that bitcoin (BTC) was no longer a “fringe asset.”

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The analysis began by saying that markets have recently been reacting to the gradual reopening of Western countries as coronavirus vaccinations gather pace. In light of this, DBS analysts decided to compare how assets are correlating with one another. This analysis included bitcoin, due to its overall momentum, but also because of its recent price swing.

Bitcoin correlations

The bitcoin portion of the analysis points out that the leading cryptocurrency only grew to be an asset class, with a sizable market cap, late last year. Because of this, it dates its bitcoin data from after November 2020. Due to this limited time span, the analysis added that it used hourly data, instead of daily returns. 

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To compare how bitcoin related to markets overall, it decided to analyze correlation with continuously traded S&P 500 futures. The analysis initially found that bitcoin positively correlated with S&P 500 futures, meaning they traded similarly overall. However, the correlation was rather weak, at 0.20, meaning that similarity wasn’t particularly notable.

Bitcoin influence

Despite this weak correlation, the analysts wanted to determine if any drastic moves of bitcoin’s had a noticeable market effect. To determine this, they identified four points where bitcoin’s hourly return was greater than 10% or worse than -10%.

Then, they calculated correlations with the S&P 500 during the immediate period afterwards. After this, they compared the post-extreme period correlations with correlations from more normal periods.

According to the results, bitcoin and the S&P 500 showed a higher positive correlation of 0.26, after an extreme move. This turned out to be noticeably higher than the correlation under more normal periods of 0.19. This “suggests that broader equity sentiment could become more coupled with sentiment in bitcoin markets,” after a large swing. 

Another statistical test performed by the analyst only emphasized bitcoin’s influence. According to the analysts, there is “strong statistical evidence that the volatility of S&P 500 futures is markedly higher than normal in the aftermath of an extreme bitcoin move.”

Remarking that bitcoin is no longer a “fringe asset,” the analysts suggested that it “may be wise to keep an eye on developments in this space.”

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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