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Bitcoin and the S&P500: From friend to foe

Aakash Athawasya

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Bitcoin pre market-crash saw no friends
Source: Unsplash

Bitcoin has changed its set of friends in the past year. With a friend circle which started out with Liberty Reserve and ecash, and then evolved to an altcoin following, now Bitcoin’s friend’s circle, if you’d call them that, is reflecting the real world.

Since the beginning of the year, Bitcoin has found movement, sometimes with sometimes against, the market leaders of opposing asset classes – the S&P500 representing equities and gold representing the commodities. With 2020 riddled with global market havoc owing to the pandemic, Bitcoin saw growing popularity among the three markets, as the cryptocurrency’s price increase in the previous quarter has shown.

Following the crash, however, the relationship between Bitcoin and the aforementioned macroeconomic assets shifted and is quite different from what it is today. According to a recent report by Ecoinometrics which looks at the correlation between Bitcoin to the S&P500 and gold after the stock market crash in March 2020, as the first wave of American cases came to the fore, shows very little correlation. 

Firstly, for Bitcoin and gold, the correlation before the crash was +0.17 and after the crash, it increased to +0.34. While this is a minor increase, it does not mean that the two assets are showing a positive correlation. Secondly, for Bitcoin and the S&P500, the pre-crash correlation was -0.18 and post-crash was +0.48. In comparison, it is clear that Bitcoin moved closer to the S&P500 than to gold, but not by a significant amount. The report stated,

“Yes BTC is getting more correlated to the SP500 after the crash. But the correlation coefficient for that period is still +0.48 which is not that high.”

While it is still premature to draw conclusions from that very statistic, as the report alluded to, given the uncertainty in the market prevailing at the time, now that a full quarter has elapsed since the crash, there are a few tell-tale signs. Bitcoin stability following from a period of strong recovery as the American economy was pumped with fiscal and monetary stimulus has seen that post-crash relationship strengthen. 

Bitcoin – S&P500 correlation | Source: Coinmetrics

According to data from Coinmetrics, the 180-day Spearman correlation between Bitcoin and the S&P500 has reached its all-time high. In the current year, the correlation between the two was consistently increasing. The major dip came in May, when Bitcoin saw a massive increase, reaching as high as $8,000 and the SPX shuttled between 2,800 to 2,950 points. Since then, however, Bitcoin’s price has been trading in a strong range, and the S&P500 has been increasing steadily.  

The correlation as it stands today is positive, but an increase in the future cannot be easily predicted. Bitcoin is volatile, despite its current period of stability and the United States might be on the precipice of another wave of Covid-19 cases, which will hurt its domestic index. The onus for the continued correlation hence rests on which will happen first- a Bitcoin breakout or a Covid-19 surge. Let’s hope for the former. 

Aakash is a full-time cryptocurrency journalist at AMBCrypto covering primarily the US market. A graduate in Finance and Economics, his writing is centered around regulation and institutional investment within the cryptocurrency space. He is also an aspiring triathlete.