Why Bitcoin Is Directly Correlated to the Stock Market

21 thg 9, 2020

Hello Traders and Investors.

Here I would like to shine some light on why the stock market is now currently the leading indicator (here we use the SNP500) against all commodities, assets, and tradable cryptocurrencies during and post the COVID-19 Crash. Although the Bitcoin market has been showing strength, the general public has been growing eerie about the current stock market situation and all eyes are currently on the SNP500 Index. It's important to note that when Bitcoin and the SNP500 is directly compared to each other from a visual perspective, we can see a strong correlation between the two in terms of price action. We have yet to see the decoupling happen in the near future, but due to the largely correlated price action since the recent COVID-19 crash, the SNP500 has brought down the price of Bitcoin with it, and also bring it up during it's recovery - and if current price action is suggesting that we may be in a correction, we can also assume that no matter how strong Bitcoin is in terms of technicals and fundamentals, we have to play with the market as is.

This begs the question, "Where is Bitcoin headed?" We don't know; however, since we are seeing Bitcoin and the SNP500 achieving a historical correlation after the COVID19 Pandemic Crash, we can only assume that Bitcoin will also correct. There is currently a strong divide between two categories of people who trade traditional assets and cryptocurrencies:

1. Cryptocurrency Investors = Bitcoin is currently king and will outpace traditional markets, regardless of what happens - even if the stock market crashes.
2. Traditional Market Investors = We all more or less can agree that the stock market is overdue for a real correction, and Bitcoin will follow.

From our observations, we believe the current correlation during this pandemic is more than enough evidence that we have to mostly agree with category #2 - where if traditional markets correct, Bitcoin will also correct. Bitcoin has historically exhibited almost no correlation to traditional assets since the introduction back in 2009, but since the market is now assumed to be as a matured asset class after trading for 10 years on the market, we can slowly assume that there will be more consistent correlations as the timeline grows.

The SNP500 is one of the best indicators of how well America's top companies are performing and the valuation of the markets is impacted by many things, including economic trends and geopolitics. In the end, charts are nothing but lines explaining what has happened in the past, but the lines of the past three months may be suggesting to the general public as a fair warning that a correction may be in again for Bitcoin. How far? Only time will tell.

One possible explanation for the Bitcoin correlation with the stock market is the amount of people who are attempting to be risk averse as much as possible in times of hardships. For investors who have been offloading their equities, the last thing they want to do is to take their capital and buy Bitcoin again, only to lose it all. Even though interest rates are currently unenthusiastic and inflation is a risk because of quantitative easing, many have been favoring cash. This is why we want to make the point that holding cash is also not a bad thing in times of hardships.

Another theory is that the Bitcoin correlation to stocks strengthens whenever this cryptocurrency faces stubborn levels of resistance. One threshold that BTC has repeatedly struggled to smash through over the years is $10,500 – and in the second quarter of 2020, there were a number of failed attempts to crack this price zone, and now it is facing the same resistance once again. It’s also worth keeping in mind that this results in a much directly correlated market between crypto and the stock market. A massive increase or decrease in Bitcoin prices tends to have an effect on hundreds of other alt coins.

Many crypto analysts (category #1, as stated above) are hoping for an “uncoupling” that breaks the correlation between Bitcoin and the stock market – meaning that the cryptocurrency treads an independent path and isn’t swayed by macroeconomic factors such as interest rates, inflation and unemployment.

Although there have been some similarities in the past few months, the evidence of Bitcoin correlations to the stock market is far from conclusive - this write up is only an observation and not a conclusive test result. Prior to the coronavirus pandemic, when investors were being spooked by the looming threat of a US-China trade war, some developments that suggested tensions between Washington and Beijing were worsening actually appeared to help Bitcoin surge. As we can see, this is a perfect example of why we may not currently understand the real historical correlation we are having with Bitcoin at the moment.

This leads up to our next point - Diversification.
There’s a reason why Bitcoin correlations matter: diversification. Pro investors often try to invest in a multitude of equities and financial instruments that aren’t influenced by the same factors, helping to mitigate losses in the event of a downturn, also known as hedging the market. If crypto and the stock markets rise and fall in tandem with one another, this could create unwelcome exposure for a poorly balanced portfolio. But with Bitcoin currently facing similarities to the US stock market, Bitcoin for the past few months can be considered by many a lucky draw since it recovered similarly to the SNP500.

When it comes to Bitcoin and the stock market, some experts also believe that the correlation will inevitably increase in the years to come. We believe this will happen as well as previously stated above, the market has been trading for almost a decade and is now known to the general public. The cryptocurrency market is doing its best to keep its clear distinction as a unique asset class by offering new forms of phases in technology (ICO phase, DEFI phase, and so forth). It’s a well known fact that institutional investors are intrigued by Bitcoin – and through the rollout of derivatives such as futures and options from 2018, it is becoming increasingly possible for people to acquire cryptocurrencies for the first time. Some experts believe that maturity in the crypto markets will only serve to strengthen the bond with stocks.

As a final conclusion, we would like to conclude on one question: Will the stock market crash?
Assuming that there is a Bitcoin correlation with stocks, here’s the main piece of advice I would love to give to our users: Gaining intelligence about any stock correlation can help you make your decision about positioning in the market. Bitcoin has been one of the best introductions to mankind since sliced bread.

Some analysts fear that a bubble is about to burst – especially in indices such as the Nasdaq 100, which has recovered all its losses and actually reached a new record high even as COVID-19 cases in the US continue to rise with anger. The uncomfortable question now is if, and when, such a crash would occur. It could be weeks. It could be months, even years.

Correlations with the stock market come and go, but COVID-19 remains a massive unknown that could affect Bitcoin just as much as the S&P 500. BTC has been trading within an incredibly odd trading range, meaning it’s rapidly becoming a spring that is coiled up and ready to burst any moment. Irrespective of whether it moves upwards or downwards, the jump is set to be a big one.

Trade Safe.
X Force