How Bitcoin’s Correlation with Stock Market and Gold Faces the Biggest Test of Time

The strong correlation between Bitcoin [BTC] and the stock market has been one of the most potent indicators in the market recently. The excess of uncertainty in the markets and suspicions of further downfall is now having major players to follow institutional liquidity.

The sharp drop on the 12-13th of March in Bitcoin [BTC] also threatened miner capitulation in Bitcoin which coupled with Bitcoin halving accounted for a robust short-term bearish signal. However, both these assets are now witnessing a V-shaped recovery, despite the rampant figures for unemployment and a global lock-down.

Moreover, while the correlation between Bitcoin and the stock market has sky-rocketed, the same is not true for gold.

In the past, the correlation between Gold and S&P 500 has had a higher tendency of negative correlation. Meaning, a rise in one asset, leads a fall in the other. This is consistent with the risk-on and risk-off views of the market. Nevertheless, overall the markets have been largely non-correlated.

However, since the 2018 bear market, especially since the beginning of the US-China trade war in 2019 the bullishness across all investment assets can be viewed as abnormal.

Bitcoin and S&P 500 VIX Correlation in the Past

In 2018, the fear of a recession in the economy was rampant and the investors perceived ‘credit risk’ creeping in the economy. At the time, Bitcoin seemed like a leading indicator for the stock markets while acting as ‘money under the mattress.’ Brian Stutland, of Equity Armor Investments, LLC told CNBC fast money

“It seems there is a huge correlation right now between VIX and bitcoin. 30 trading days ago, that is starting to measure out credit risk in the market,” He added, “That’s what cryptocurrency is becoming a way to sort of de-risk yourself from credit risk in the banking industry.”

Since then, the Governments have been on large-scale deleveraging by printing money and reducing interest rates. However, just when the global economy was starting to look positive as the stock markets made new all-time highs, COVID-19 has cried havoc on the world.

Furthermore, the Quantitative Easing approach taken by Governments to expand the economy has now reached its critical end, and the economists are looking down at a paradigm shift.

Note: S&P500 VIX accounts for implied volatility in the stock markets, but the chart of BTC volatility is of realized volatility in the past few days. Hence, while one is perceived volatility, the other is the actual volatility in the market.

Bitcoin and Gold

After the end of the bear market in crypto and stocks in 2018, hopes of Bitcoin gaining a safe-haven status started to grow.

Beginning with the US-China trade war, Bitcoin enjoyed increasing correlation with gold as the Chinese attempted to devalue Yuan. Hence, businesses across China seemed to be turning towards assets like gold and Bitcoin. 

Moreover, the weak correlation continues in the following months even during the bear market of 2019, when Bitcoin corrected from $14,000 to $6,400. 

Furthermore, the correlation grew stronger when Bitcoin [BTC] price responded to the military attacks between the US and Iran at the beginning of the year. 

However, it started to ended near to Bitcoin halving and stock markets making new highs. At last, with the crash in March due to coronavirus marked the end of the correlation. It was primarily due to a steeper fall vs. gold and timely correction with the stock markets. 

Correlation Does Not Equal Causation 

Currently, Bitcoin hangs to a thread with its strong correlation with the stock market. Many analysts are looking for a quick decoupling with SPX so that Bitcoin can begin a bull run at the back-drop of the depression that the world is going under. 

However, despite the developments over the years, Bitcoin remains to be the most volatile asset vs.other investment assets like the stock market, gold, and even emerging currencies. All these correlations have been short-term and weak as well. Hence, it is safe to say that the similarity in trends was partly due to coincidence and partly due to macroeconomic events.  

Nevertheless, it is giving rise to other socio-economic problems like increasing wealth gap, less purchasing power and higher rate employment.

Cantering Clark, a trader and crypto analyst tweeted, 

With the current technology and availability of information, there has never been a time for things to be priced in as fast as they currently can be.

Hence, there is a strong probability that both the SPX and Bitcoin can rise together as well marking a quick recovery of the economy, and hence of the risk assets.  

According to global macroeconomist, Ray Dalio, 70% of the money and credit that exists in the economy is in the form of the US Dollar. Hence, the US Governments’ over $6 trillion monetary stimuli since the COVID-19 crisis hit the markets has been absorbed by the global demanding keeping the inflation in check.

However, other countries are likely to face an inflationary crisis as they do not have the liberty to print Dollar or Euros like the US and Europe. Moreover, the rising debt of the Governments will have to be paid in the future as well, which will further put extreme pressure on the economy. 

The limited supply of Bitcoin [BTC] along with decentralized custody builds a strong case for safeguarding one’s wealth. However, with the current rate of adoption and the small size of the markets, there is considerable risk associated with this asset class.

The only asset which has been consistent with the current economic sentiments is Oil. The end of Q2 2020 will likely establish the mid to term long term trend for the stock markets and crypto markets alike. Moreover, it will also reflect the on-chain state of Bitcoin post halving in May when the selling pressure will reduce, but the fear of miner capitulation will grow stronger.