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Bitcoin and S&P 500: The Perfect Couple or is Uncoupling in the Future?

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:

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The image above shows the negative correlation between Gold and the S&P 500

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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.

Sources:

https://www.forbes.com/sites/investor/2020/05/13/bitcoin-and-stocks-correlation-reveal-a-secret/?sh=1c820ae612c2

https://www.marketwatch.com/story/heres-what-bitcoins-relationship-with-the-stock-market-and-gold-looks-like-over-the-past-90-days-2019-08-21

https://www.bloomberg.com/news/articles/2020-10-02/bitcoin-s-rising-correlation-with-stocks-debunks-haven-narrative

https://www.bloomberg.com/news/articles/2020-10-02/bitcoin-s-rising-correlation-with-stocks-debunks-haven-narrative

https://coingeek.com/btc-correlation-with-stocks-shows-it-is-no-safe-haven-asset-or-digital-gold/
https://www.coindesk.com/bitcoin-correlations
https://www.csspartners.co.uk/2020/the-curious-stock-market-and-bitcoin-correlation/
https://blockchain.news/analysis/Why-bitcoin-price-correlation-stock-market-is-high-now
https://cointelegraph.com/news/correlation-between-bitcoin-price-and-stocks-reaches-a-new-all-time-high
https://currency.com/why-bitcoin-correlations-with-the-s-p-500-are-worrying-right-now
https://www.investingcube.com/bitcoin-price-unfazed-as-it-correlates-with-the-u-s-stock-market/
https://markets.businessinsider.com/news/stocks/bitcoin-outlook-today-portfolio-diversification-value-cryptocurrency-mainstream-price-jpmorgan-2021-1-1029991266

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Jordana Cohen,

Associate

Alpha Sigma Capital

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Alpha Sigma Capital
Daniel Siciliano

F. Daniel Siciliano is an Independent Director of the Federal Home Loan Bank of San Francisco and Chair of the American Immigration Council. He is the former faculty director of the Rock Center for Corporate Governance at Stanford University and former Professor of the Practice and Associate Dean at Stanford Law School. His work has included expert testimony in front of both the U.S. Senate and the House of Representatives and for 2009, 2010, and 2011, alongside leading academics and business leaders such as Ben Bernanke, Paul Krugman, and Carl Icahn, Professor Siciliano was named to the “Directorship 100” – a list of the most influential people in corporate governance.

Siciliano was also co-founder, CEO and ultimately Executive Chairman of LawLogix Group, Inc. – a global software technology company named 9 consecutive times to the Inc. 500/5000, several times ranked as one of the Top 100 fastest-growing private software companies in the US and named to the US Hispanic Business 500 (largest) and Hispanic Business 100 (fastest growing) lists for 2010 and 2011. In 2012 he sold a majority stake of the company to PNC Riverarch Capital, continued as Executive Chairman, and led the sale of the company to Hyland Software/Thoma Bravo in 2015.

Siciliano is a co-founder and board member of the Silicon Valley Directors’ Exchange (SVDX), Chairman of the national non-partisan American Immigration Council, past-President of the League of United Latin American Citizens (LULAC) Council #1057, and an active member of the Latino Corporate Directors’ Association.


Siciliano’s related areas of expertise include executive compensation, corporate compliance, the legal and social impact of autonomous (AI/robotic) systems, and corporate technology strategy and security. He has served as a governance consultant and trainer to the Board of Directors of dozens of Fortune 1000 companies (including Google, Microsoft, Fedex, Disney, Entergy and Applied Materials), is an angel investor and consultant to several firms and companies in Silicon Valley, Hong Kong, India, and Latin America, and currently serves as an independent director on the board of the Federal Home Loan Bank of San Francisco. He lives in Los Altos, California.