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Bitcoins Relationship With Traditional Financial Markets

2020 was filled with surprises. A pandemic brought the world to a standstill leading to a major financial crisis, the previous president of the USA became the first in history to be impeached twice, and central banks can’t seem to locate the off button on their printers.

It has been an unpredictable year, to say the least, but as the dust settles, Bitcoin’s growth is probably one of the few things you could have predicted in 2020.

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Bitcoin has long been described by crypto enthusiasts as “digital gold,” which paints the picture of Bitcoin as a “safe haven.” In essence, this means when the stock market crashes, Bitcoin will retain its value. It may be premature to suggest this correlation, especially with numerous examples where Bitcoin prices trended similarly to the S&P 500.

Additionally, some would argue to categorize Bitcoin in the same asset class as Gold, which holds thousands of years of history as a store-of-value mechanism, may be rash. In March 2020, gold hit nine-year highs as investors sold off their positions in the stock market and moved money to prepare for the events to come. However, there didn’t appear to be much interest in cryptocurrency by institutional investors at the time.

Bitcoin is resilient and has a built-in halving protocol that ultimately leads to reduced supply and higher prices. With a current circulating supply of 18.6 M, this leaves around 2.4 M left to be mined and demand has oft surpassed the available supply to lead the bull run on the heels of institutional capital.

A common sentiment surrounding this process is that it is factored into the going price of Bitcoin, but looking at the recent dramatic growth from Oct — January, it’s clear that this is not the case. Considering that Bitcoin has an immutable supply, no matter how much interest there is in mining, the price is generally agreed to be dictated by the amount of newly mined coins in circulation versus the current supply. Based on this theory the next halving event in 2024 could result in BTC/USD reaching nearly $300,000.

Correlation Does Not Imply Causation

In 2019 there was predominantly a negative correlation between Bitcoin and the S&P 500 which has been often attributed to growing fears of economic instability before the current extraordinary world circumstances. There have been two stand-out occurrences where both the S&P 500 and Bitcoin experienced dramatic losses simultaneously.

In March 2020, both plummeted alongside each other, injecting doubt into the potential of the safe-haven narrative. Additionally in 2018, at Bitcoin's historic highs at the time, the price tumbled dramatically while the S&P 500 also dropped nearly 10 percent. It can be easy to assume a correlation based on these events as the two assets had a seemingly obvious congruent relationship. It raises the question, that during these periods was Bitcoin mirroring the S&P fluctuations, or were Bitcoin holders selling off in times of extreme market volatility?

In late 2020 and into early 2021 the exact opposite happened as Bitcoin posted monumental gains while the S&P remained relatively stagnant. In mid-2019 a similar occurrence presented itself where Bitcoin rose nearly 60 percent while the S&P dropped more than 5 percent.

It seems that over Bitcoin’s short history, it may be safe to assume there isn’t a solid correlation. However, with more and more institutional money pouring into crypto assets, these behemoth holders may have a profound effect on how Bitcoin prices react in the markets.

Is There A Strong Relationship?

It’s tough to say. Technical analysts in early 2020 would have argued with certainty that there is an extremely strong relationship and Bitcoins price fluctuations can be compared to “a super-leveraged stock position.”

However, as Bitcoin has matured, the once clear relationship has become foggy. Liquidity, due to actions of the federal reserve, are a likely explanation for recent Bitcoin ATHs. The stock market and Bitcoin have both been affected to a great extent by these changes in inflation. If inflation continues into 2021, stocks will remain nominally fine and keep ascending, even though USD as an example, will be devalued. If this were to come to fruition, Bitcoin could explode.

On the flip side, this cash could also not be utilized and growth in the cryptocurrency sphere may not be as pronounced. Analyzing correlations in the crypto market can be a very insightful metric to track as the cryptocurrency space reaches maturity and more institutional money floods the space.

However, considering Bitcoin’s relatively recent nascency, it is far too early to pinpoint its asset class and determine the strength of its correlation to traditional financial markets.



ProBit Global is a Top 20 crypto exchange worldwide servicing crypto enthusiasts with unlimited access to trade and buy Bitcoin, Ethereum and 800+ altcoins in 1000+ markets.

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ProBit Global

ProBit Global is a Top 20 crypto exchange worldwide providing unlimited access to trade and buy Bitcoin, Ethereum and 600+ altcoins in 1000+ markets.