Bitcoin has been said to be analogous to gold, calling the cryptocurrency the new “digital gold.” Many have also referred to Bitcoin as a “store of value” or “safe haven asset.” However, it’s becoming more evident that Bitcoin does not fulfill the role of any of the titles.
Data collected indicates that Bitcoin does not necessarily correlate with gold, but rather the cryptocurrency correlates positively with the S&P 500 stock index. The statistical relationship between Bitcoin and the U.S. stock market is said to have a very strong correlation, with Bitcoin magnifying market trends with its very volatile price swings. Below are some images indicating the relationship:
The image above shows the negative correlation between Gold and the S&P 500
The images above depict the positive correlation between Bitcoin and the S&P500
You would think that Bitcoin would be used as a hedge, negatively correlating with the stock index: when the stock market crashes, people would invest in Bitcoin in an effort to hedge his or her position. However, this is not the case according to statistically significant aggregated data. There are many possible explanations for the positive correlation between Bitcoin and the S&P 500. One potential reason for the current positive correlation is due to the amount of people trying to be risk averse and investing in Bitcoin. More people are investing in cryptocurrencies, and institutional investors are becoming intrigued with the opportunity. It is noted that as the cryptocurrency market matures, the correlation between stocks and Bitcoin will strengthen. Another possibility is due to the adamant levels of resistance; the correlation strengthens as Bitcoin faces more resistance.
But what does this correlation mean for the average investor? First and foremost, if one is trying to diversify his or her financial portfolio, then Bitcoin and other cryptocurrencies may not be the right hedging choice. In the event that the stock market crashes, Bitcoin would crash too; ultimately, it would devastate the crypto market. As more high profile investors and investment banks enter the crypto market and invest in Bitcoin, it is predicted that the correlation between Bitcoin and the equities markets will inevitably increase. The correlation increase signals that the asset class is maturing; but, while Bitcoin becomes more mainstream, its diversification benefits decrease. In the event of a financial economic downturn, the investment in Bitcoin may create a poorly balanced financial portfolio that does not mitigate losses, but rather multiples them.
Although data indicates a positive correlation between Bitcoin and the S&P 500, there is simply not enough evidence nor predictors quite yet for a continued positive correlation in the future. While stocks are more established, Bitcoin is a relatively new concept and is not mass adopted yet. Additionally, Bitcoin is not regulated yet, and so regulation may have an impact on the future of the cryptocurrency and its price volatility. The current lack of regulation adds a layer of additional risk. Many cryptocurrency exchange systems behind Bitcoin and other crypto assets are already under investigation and will be reviewed further. Legal pressures may control the fate of the cryptocurrency.
Bitcoin may correlate positively with equity markets, but many hope that Bitcoin will have its own independent trend and be less influenced by macroeconomic factors. Crypto analysts and investors, alike, are wishing for an “uncoupling” that breaches the correlation between stocks and Bitcoin. In the case of an uncoupling, Bitcoin will, indeed, become the “digital gold” of the century. But for now, we will have to wait and see what happens.
Disclaimer: Bitcoin and cryptocurrencies are risky and volatile investments. These comments above should not be perceived as investment advice.
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