The continued correlation between Bitcoin (BTC) and U.S. stocks in 2020 is calling into question crypto’s place as a hedge against market uncertainties.
The largest crypto by market capitalization recently suffered a $1,500 decline which coincided with a massive gutting of tech stocks.
Bitcoin Moving in Tandem With the Equity Market
Bitcoin and the stock market have seen a great deal of co-movement in 2020, with their respective peaks and troughs coinciding regularly. For Bloomberg analyst Joe Weisenthal, this apparent correlation is proving to be the biggest problem for BTC in 2020.
Indeed, Bitcoin proponents argue that BTC is a haven asset. Thus, the BTC price action should behave differently from that of the mainstream equity market.
However, on multiple occasions in 2020, Bitcoin has failed to offer any diversification from the stock market. During the Black Thursday panic of mid-March, both arenas experienced significant declines with BTC sinking to about $3,800.
At the start of September, the same phenomenon occurred with Bitcoin’s $1,500 drop following heavy selloffs for the S&P 500, the Dow, and the Nasdaq.
2020 Is a Unique Year
While the data does suggest a correlation between Bitcoin and the stock market, an argument could be made for characterizing 2020 as a unique year. Indeed, Weisenthal raises the same point, calling 2020 “an exceptional year,” but also adding that such periods are when uncorrelated assets prove their mettle.
Tweeting on Wednesday, stock-to-flow (S2F) model creator PlanB maintained that Bitcoin was still a hedge asset. According to him, the still-maturing BTC will become a more robust risk-off commodity compared to gold as it becomes scarcer.
However, for now, the data points to a continuation of this correlation trend, at least in the short term. Quantitative easing by the Federal Reserve means that more cash is available for investments.
At the time of writing, Bitcoin is attempting to consolidate above the $10,000 level after staving off multiple dips below $9,800. The Nasdaq 100 futures market is also seeing a similar recovery, pointing to the return of some optimism among investors.
US Dollar Recovery?
The recent U.S. dollar recovery might play a pivotal role in determining the destiny of the price action for both Bitcoin and the stock market. For Robert Balan of the stock market analytics platform Seeking Alpha, the U.S. dollar recovery may extend until the middle of 2021.
Typically, a weakening dollar triggers a bullish advance for Bitcoin. Indeed, as the greenback fell to its lowest level in over two years in 2020, BTC saw a sharp recovery from its Black Thursday crash.
However, according to FxPro, the recent U.S. dollar gains are not enough to flip the currency’s downtrend narrative. The forex brokerage service believes the current one-week winning streak may be a bull trap, meaning a further decline for the greenback could be in store.