Does Bitcoin and S&P 500 Really Correlate?
One of the most common narratives in the Bitcoin space is that it is entirely uncorrelated with other financial markets. Many people thought that cryptocurrencies are separate from normal economic trends and that BTC is unaffected by any financial crisis or recession. But as for mid-2020, this statement is quite doubtful.
The first cryptocurrency appeared amid the deepest financial crisis since the Great Depression. Thanks to that, in the eyes of the first adherents and developers, Bitcoin became an alternative to the financial system: “There’s always time for Plan B.”
The early development of “digital gold” coincided with the begging of the rapid recovery of the US economy fueled by quantitative easing. Moreover, in developed countries, a period of growth, low inflation, and high prices for many assets began. During all this time, bitcoin has been growing almost synchronously with the S&P 500 index, often recalled as the “barometer of the American economy.”
Amid the collapse of financial markets in March, the correlation of the price of Bitcoin and the S&P 500 index reached the highest values in history. This was revealed in a special issue of the Arcane Research Analysts’ report.
After this flash crash, the correlation remained: whenever the stock market would rally, so would BTC, with price action correlating even on the small time frames.
Bitcoin’s correlation with equities is back once again after decoupling for most of May and the first half of June. As digital asset manager Charles Edwards recently noted: “Bitcoin & stock correlation in 2020. We have (sadly) “re-coupled” as of 10 June. Correlations at all-time highs. Notice the trend? High levels of fear and uncertainty (eg. VIX) = high levels of correlation.”
Moreover, the well-known Bitcoin analyst Plan B stated that Bitcoin is correlated (95% R2) and cointegrated with US equities (S&P500), and quantitative easing causes a rapid increase in levels of both.
Also, he stated that thanks to the support of the US Federal Reserve of Stock Market through record cash incentives, Bitcoin will only surge: «Yes FED tried to stop QE in Nov 2018, the effect on S&P and BTC were similarly disastrous. FED will never do that again. IMO there is no turning back, it is QEternity..»
In conclusion to a series of tweets, he wrote that the correlation affects the price of bitcoin much more than “Whales”, “futures manipulation”, “Plustoken scammers”, etc.
As a result, in 2020, one of the most common narratives about cryptocurrency became highly doubtful. Bitcoin is affected by the movement of the S&P 500 index, and therefore the mood in the financial markets as a whole. On the one hand, a big problem for cryptocurrency maximalists who do not want such a connection. However, for mass adoption, possible forecasting, and institutional approval, this correlation may be positive.
