Bitcoin becomes an Asset Class with Positive Correlation with Stock Market
[TL; DR]
Bitcoin emerged as an asset class during the Covid-19 pandemic period.
BTC correlates with the NASDAQ and the rest of the stock market.
Before 2020 there was no correlation between BTC and the stock market.
Supply and demand conditions, investor sentiments, economic conditions, monetary policy, geopolitics and regulatory changes influence prices of stocks.
keywords: Bitcoin, NASDAQ, stock market,cryptocurrency, BTC- NASDAQ correlation, institutional investors
Introduction
During Bitcoin’s early days, its maximalists viewed it as a digital gold due to the perception that it is a long term store of value. They also believed that economic variables such as interest rates and inflation do not influence its price. As anticipated, Bitcoin maintained such a stance until around 2016 when its value started to correlate with that of stock markets, especially NASDAQ. The correlation of Bitcoin to the stock market became much more observable during the post-covid-19 peak era. According to Arcane research, the data analysis firm, from the first quarter of 2022 Bitcoin mirrored the behavior of NASDAQ, a stock market benchmark. Note that the NASDAQ is a weighted average composite index for broad-based capitalization with a base established on 5 February 1971. It is inclusive of its three tiers namely Global Select, Global Market and Capital Market.
What the correlation between Bitcoin and NASDAQ mean
It is important to understand what the asset market correlation means and implies. Correlation is a measure of how two variables relate to each other. If the two variables are correlated their values move in a specific direction. They are positively correlated if their values move in the same direction. On the other hand, they are negatively related when the value of one of the variables decreases when the other one increases. Also, the values of the two variables can be uncorrelated or independent of each other.
If the value is closer to 1, the two variables are highly correlated. For instance, if the value of Bitcoin is increasing at a rate similar to that of NASDAQ (in the same direction) then the two are highly correlated. As a result, the correlation value will be closer to 1.0.When the correlation index is closer to minus 1 (-1) the two variables are negatively correlated. If the index is -1, it means the values of the variables move in the opposite directions. Basically, the correlation index of NASDAQ and Bitcoin lies between -1 and +1.
Source: Dwcom
The current BTC- NASDAQ status
From mid July to the end of the month, the correlation between BTC and NASDAQ was decreasing, showing weakening correlation between the two. This is because during this period the 40 day correlation index was less than 0.50, indicating that it is edging closer to -1. This is different from the situation in April when the correlation was high, around 0.7.What it means is that the value of BTC was moving in the same direction as that of NASDAQ.
According to Arcane Research, the BTC-NASDAQ index shows correlation between the two since May this year. By the end of Q2-2022 heading into Q3 the correlation remained positive.
History of BTC-NASDAQ correlation
The correlation between BTC and NASDAQ emerged during the Covid-19 era due to sustained institutional investments. Examples of institutions that invested in BTC include MicroStrategy, Galaxy Digital Holdings, Tesla and Coinbase Global.
From 2009 to 2015 there was no correlation between BTC and NASDAQ. In fact, the early signs of correlation between BTC and the stock market were observed in 2020. Several analysts believe that the increasing awareness of the potential of BTC among retail and institutional investors that started around 2017 led to the greater adoption of Bitcoin as an investment asset, a factor that enhanced its correlation between the prices of cryptocurrencies and stocks.
The following chart shows when a strong correlation between BTC and NASDAQ started, in April 2022.
Source: Arcane
However, the signs of increasing correlation between BTC and NASDAQ became evident in the last quarter of 2021 when the index figure rose above 0.2. From there, it further rose to 0.6 by January 2022 before reaching 0.7 in April. The Next chart indicates the correlation of BTC and stock market since its establishment in 2009.
Source: Arcaneresearch
Based on this graph, the correlation between BTC and the stock market began in 2020 and increased in 2021 into 2022.
Possible reasons for correlation between BTC and stock market
Some analysts believe that many investors now view BTC in a similar way to traditional risk assets like stock. This follows a massive adoption of Bitcoin and other cryptocurrencies during the covid-19 era. Since the price of BTC quadrupled during the covid-19 era, many investors pulled out their funds from the stock market and invested in Bitcoin and other cryptocurrencies. When the market recovered to the pre-pandemic levels, investors had concluded that Bitcoin is another investment asset class worth investing in.
Also, many institutional investors invested heavily in cryptocurrencies in that era. The fact that a country like El Salvador adopted BTC as a legal tender helped to instill further confidence in it.
Since many investors accept that BTC is an asset class, they got interested in it to the extent of creating new investment assets like BTC exchange traded funds (BTC-ETF) which are regulated in several countries including the United States. As such, more crypto-related, but familiar investment assets, exist in the traditional financial market. This means that many traditional investors who invest in crypto ETFs are indirectly trading in cryptocurrencies, something that increases their demand and popularity.
Source: Coinstouse
The fact that BTC correlates with S&P 500 (SPX) and the NASDAQ 100 is significant. As a fact, SPX relates to the market performance of large-capitalization stocks. Thus, most investors are treating BTC in the way they do to traditional investment assets. In other words, the investors consider similar factors when investing in traditional assets and BTC. The supply and demand conditions, investor sentiments, economic conditions, monetary policy, geopolitics and regulatory changes are the key categories of factors which influence the level of investment in both BTC and stock markets. Now, this is the major reason why the two correlate.
Conclusion
Before 2020, there was no sign of correlation between the stock market and Bitcoin. Therefore, their correlation emerged in 2020 but became more positive during this year. It was during the covid-19 pandemic period that BTC became another asset class, which investors treat in the same manner as the stock market. The correlation between BTC and NASDAQ, for example, significantly increased during 2022. However, some pessimists believe that this correlation is a short term development.
Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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