Bitcoin has existed as an uncorrelated asset for a long time. The narrative for much of its existence has been that it is invaluable to the vast majority. It was only of value to a very small group of people. Recent years have created awareness of the cryptocurrency world and demand has risen quickly.
Bitcoin was viewed as an uncorrelated asset by people who did not have all the information. In early 2021, VanEck compiled data that suggested the movements of Bitcoin and other markets were not clear.
It was compared to gold, real estate, and the S&P 500, including other markets. Between 2013 and 2019, no clear pattern was visible when related to Bitcoin. However, there has been a visible shift in these patterns between 2020 and 2021. This is mainly when it was compared to the gold and stock markets.
This change is not an anomaly. It is the status of gold that gives the markets an inverse relationship. Gold is seen as a hedging instrument when the stock market is volatile. An argument comes that the relationship between Bitcoin and gold is shaky at best.
The theory was that investors would treat Bitcoin as a way to store value. This was because there was a downturn in the wider market. This situation would give Bitcoin the same value as gold. However, Bitcoin has previously existed when the economy prospered. This means that the theory was never tested.
Oliver Renick is an analyst at TC Ameritrade. He argues that Bitcoin is far more relevant to macroeconomic events than gold. He compared Bitcoin to "digital copper" rather than digital gold. His suggestion is that Bitcoin is more like copper. It acts as a “risk-on” asset, while gold is a “risk-off” hedge. It may not be such a good development if Bitcoin is seen in the same eyes like gold. This will greatly reduce its trading potential.
Market demand seems to show a negative correlation between gold and Bitcoin. In May 2021, there was a May sell-off in the crypto markets. It might have pushed fleeing investors to buy more yellow metal.
When related to the stock markets, Bitcoin seems to be taking a different turn. The last 2 years or so have strengthened the argument. It is believed that Bitcoin is correlated to the stock markets. It also suggests that the bond could become stronger.
There was a cryptocurrency Black Thursday when the stock markets started to fall. This happened in March 2020. This was because of the widespread uncertainty regarding COVID-19. More recently, investor uncertainty has led to Bitcoin’s volatility in price action.
There are numerous factors that explain why Bitcoin is compared to the stock markets. These include;
the meme stocks movement. This began with GameStop in February. It came back around AMC shares and caused waves in the stock trading world.
a new generation of digital-savvy investors. These bridge the gap between crypto and stocks. They explain why there’s a rise in the correlation between gold and Bitcoin.
the inflow of institutional funds to crypto. The “uncorrelated” no longer makes sense. If both markets get to a point where they have the same participants, the items have to be correlated.
If the institutional trend goes on, Bitcoin’s correlation to the stock market will increase. This depends on whether firms want to retain Bitcoin on their balance sheets. The head of communication at Bybit Exchange is Igneus Terrenus. He believes that it will not happen any time soon.
“Things may change in the long term when institutional adoption truly kicks into gear. More of the 40,000-plus publicly traded companies will start to put BTC on their balance sheets. But at the moment, most institutional investors are using Bitcoin as a diversifier in their portfolio. We are yet to see any major sign of convergence in price movements.” - Igneus Terrenus to Cointelegraph
The relationship between Bitcoin and the stock market is two-way. Since what happens in the stock markets could cause shifts in the Bitcoin market movements, could the opposite also be true? It seems possible. It will allow the flagship cryptocurrency to become more related to macroeconomic factors. This is something that was rarely possible before.
Bitcoin could ultimately affect the global stock markets. This is if the value of corporate balance sheets becomes irregular. The CEO of Damian Partners, a fintech management company, gave his view. He suggests that Bitcoin’s price cycles could influence institutional investors.
External factors that impact the price of Bitcoin include;
availability and cost of mining equipment
availability and regulatory developments
Many firms would not necessarily be enthusiastic about adopting Bitcoin as MicroStrategy. It is more likely that they would take a more prudent and diversified path if they choose to invest in crypto.
Another aspect to consider would be if Bitcoin was closely related to the stock markets. What would happen to the rest of the cryptocurrency markets? Currently, except for a few exceptions, the crypto markets generally follow Bitcoin’s lead.
There is an investor base split between institutions and individual investors. Would altcoin markets be less correlated to Bitcoin? Institutional interest in cryptocurrencies barely extends down the ranking tables of crypto. The initial change in investor profile is a straightforward explanation for this correlation. It explains why Bitcoin is rarely performing in the same way as it has during previous halving cycles. Other factors are also in play. Regardless of what the future holds, Bitcoin has gained a link to global markets. This could not have been predicted in the past.
Pillar Article Intro (if needed):
An aspect to consider would be if Bitcoin was closely related to the stock markets. What would happen to the rest of the cryptocurrency markets? Currently, except for a few exceptions, the crypto markets generally follow Bitcoin’s lead. If there is an investor base split between institutions and individual investors, would altcoin markets be less correlated to Bitcoin? Institutional interest in cryptocurrencies barely extends down the ranking tables of crypto.
The initial change in investor profile is a straightforward explanation for this correlation. It explains why Bitcoin is rarely performing in the same way as it has during previous halving cycles. Other factors are also in play. Regardless of what the future holds, Bitcoin has gained a link to global markets. This could not have been predicted in the past.