Bitcoin and S&P 'Largely Uncorrelated' & 'Not Uncorrelated' - Analysts
A look at a larger picture shows that bitcoin (BTC) and stocks have been uncorrelated for most of the coin's existence, says an analyst, while another one adds that BTC is "not an uncorrelated asset." It's a matter of nuance, it seems.
The question of whether or not bitcoin is correlated with the stock market or any other traditional financial asset is a much-discussed topic in the cryptoverse. Many argue that the question remains important because it determines whether or not bitcoin should be held as part of a traditional investment portfolio - as is often argued by bitcoin proponents who deem it an uncorrelated asset.
PlanB, the pseudonymous creator of bitcoin stock-to-flow (S2F) model, argues that Bitcoin and stocks have been uncorrelated for a decade. However, the real tests come in the times of stress and crises, such as a financial crisis, or the Covid-19 pandemic, and the data he now presented imply that BTC is "not an uncorrelated asset."
"I guess with Corona we have had one such test: BTC seems not uncorrelated. In fact, BTC looks like 416x levered S&P position to me," writes PlanB.
ICYMI— PlanB 🔴 (@100trillionUSD) June 17, 2020
- #Bitcoin and S&P500 are correlated (95% R2) and cointegrated (so probably not spurious)
- Current S&P level implies BTC $18K (or S&P to go down)
- This is consistent with S2FX model: $288K BTC at S2F56 -> it implies $4300 S&P
- Money printing (QE) pumps both S&P and BTC🚀 pic.twitter.com/0iW8WpEpt1
In his own Twitter thread, crypto trader and analyst Luke Martin, aka Venture Coinist, argued that two risk-on assets can show little-to-no correlation, and that BTC is a proof of that.
“Bitcoin has been uncorrelated almost its entire life,” represented for example by its correlation of 0 on average to the popular S&P 500 stock index over the past 3 years, he says.
Another way to visualize the how Bitcoin's correlation has oscillated from little-to-no correlation with stocks is to look at how it has evolved over time.— Luke Martin (@VentureCoinist) June 17, 2020
This chart shows 2014-present.
Not a negative corr. Not a positive corr.
Movement from little-to-no corr the entire time. pic.twitter.com/8IHfJQH21a
However, despite the lack of long-term correlation, Martin suggested that the situation has changed somewhat recently, with an increase in correlation with the stock market seen this year. According to Martin, “the peak” in correlation was seen around March 12 – the day often referred to as crypto’s Black Thursday – when he said all assets seen as “risky” sold off together.
Now, if you zoom in to this year, correlation is slightly higher between the two.— Luke Martin (@VentureCoinist) June 17, 2020
The peak was around March 12th as all "risky" assets sold off together.
(likely reason: In a crisis everything sells off together as the driving force behind that decision is dominated by fear) pic.twitter.com/Hn9nNSKGtA
This lack of correlation that bitcoin exhibits means that the cryptocurrency is “incredibly attractive in a portfolio” for investors who seek diversified exposure to a range of assets, claims the analyst.
Meanwhile, some also took to Twitter to comment on Martin’s opinion, with one user arguing that it is institutional investors that have made bitcoin more correlated with stocks this year. “For this correlation to return to 0, institutions will have to view BTC as a risk-off asset, not risk-on. Or they lose interest and go away,” the user wrote.
As reported in April, crypto research firm Coin Metrics said that unless “fundamental” changes occur in bitcoin and/or the S&P 500, the long-term correlation between the two will likely “return to levels of near zero.”
At pixel time, Bitcoin is trading at USD 9,432. It dropped 1.39% in a day and 2.68% in a week.