Since the creation of Bitcoin (CRYPTO: BTC), investors have been hoping for the day when it trades unrelated to the stock market.
Recently, Bitcoin has traded more like a tech stock or more similarly to the S&P 500. Yet there is evidence that this is more of a recent trend and that Bitcoin actually has been uncorrelated to the stock market for quite some time.
The ultimate hope for Bitcoin becoming uncorrelated to the stock market is that it will not be subject to economic policies that so often cause ups and downs in equities. Additionally, if Bitcoin trades separately from the stock market, it is viewed almost as a badge of honor for Bitcoin's development from a speculative, volatile asset to a necessary component for all portfolios.
In the current market conditions of rising interest rates and increased inflation, almost all assets have been hit hard. The majority of stocks have retreated from pandemic highs, especially tech stocks.
It makes sense that Bitcoin, viewed as an emerging technology by many, would see similar declines.
But this is only a recent phenomenon. There is growing evidence that Bitcoin is uncorrelated to stocks when the economy and crypto market are in healthier conditions.
What the numbers say
A correlation statistic is used to determine whether two things are positively correlated (they both go up), uncorrelated (they trade independent of each other), or negatively correlated (one goes up, the other goes down). A value closer to plus 1 represents positive correlation, closer to 0 means they are uncorrelated, and as numbers approach minus 1, assets are negatively correlated.
A report from CoinDesk showed that for almost all of 2021, Bitcoin remained within a range of minus 0.2 to 0.2 when compared to the S&P 500, gold, the U.S. dollar, and bonds. A value between the range of minus 0.2 and 0.2 indicates that they are largely uncorrelated.
And further research from Blockchain Center, which monitors cryptocurrency price movements, proves that Bitcoin was actually uncorrelated to the S&P 500 even further back for a stretch of nearly two years from 2019 to 2021.
But times have changed, and market conditions are becoming less focused on growth. Both the CoinDesk report and data from Blockchain Center show that Bitcoin started to become correlated to the S&P 500 in the last quarter of 2021. The 90-day correlation between them grew from 0.2 (no significant correlation) to just about 0.6 (fairly strong correlation).
Despite hitting a 17-month high in correlation with the S&P 500 this year, Bitcoin has a proven track record of actually remaining uncorrelated from equities. When market conditions become safer, Bitcoin will return to its normal self and trade uncorrelated.
Investors should welcome this news. While not ideal at the moment, there is plenty of evidence that Bitcoin has continued to take steps to becoming an independent asset. Just because it is currently correlated to other macro assets does not mean that it hasn't already decoupled. In times like these, any asset with a degree of risk is hit hard and therefore correlated in some way.
Some hope that Bitcoin could eventually become negatively correlated to equities. This means that it trades completely opposite to the stock market. When stocks are down or economic conditions are not conducive to growth (i.e., high inflation, interest rates rising, and the like), investors flock to Bitcoin for protection. However, given that the stock market generally goes up over time, Bitcoin investors wouldn't want negative correlations all the time -- just during stock market downturns.
For now, investors should take the highly correlated trends to tech stocks with a grain of salt. It is likely only a matter of time before Bitcoin returns to an uncorrelated trend.
10 stocks we like better than Bitcoin
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Bitcoin wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2022
RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.