However, in recent months we have seen that bitcoin’s price movements have started to more closely resemble the S&P 500 – a common stock market index. There are a few possible reasons for this behavior in bitcoin’s price, but with all of the speculation it is important to remember that bitcoin is still a young form of currency – it is volatile, and the causes of it rising and falling with the stock market are not well understood.
Stock Market Correlation
Throughout the majority of bitcoin’s existence, its correlation to the stock market has been very low. This has led many people to classify it as an uncorrelated asset, like gold – another property that makes it ‘digital gold’.
In these charts, you can see the correlation of bitcoin’s price to the stock market (y-axis) through time (x-axis). A y-axis value of 1 represents complete correlation to the stock market. In recent months, bitcoin has reached an all-time high level of correlation to the stock market.
In early March 2020, the stock market (and almost every other market) saw a sharp drop as fears increased over the unknown economic impacts of COVID-19. This trend was closely mimicked by bitcoin’s price, which fell roughly 60% that same month. However, as large sums of cash were injected into the US economy to increase liquidity, the S&P 500 quickly returned to normal, and so did the price of bitcoin. This shared fluctuation and timing of both the stock market and bitcoin’s price led many to speculate that bitcoin is no longer an uncorrelated asset.
Factors That Affect Correlation
Although bitcoin is often compared to gold, it is still a high-risk investment. Bitcoin has a history of price volatility, which means that anyone who puts money into bitcoin may lose a significant portion of their investment when the price dips. When investors have less cash, they are less likely to make (or keep) investments of this type. In March 2020 when the stock market crashed, it is possible that due to the uncertainty in the economy, many investors withdrew their high-risk investments, which in turn caused bitcoin’s price to fall.
The current COVID-19 pandemic has created a sense of uncertainty amongst both retail investors and institutional investors. Institutional investors currently hold a large percentage of bitcoin, which means that when they collectively buy or sell bitcoin, it has a large impact on bitcoin’s price. Institutional investors are inherently connected to the stock market, and in times of uncertainty they are also likely to relieve themselves of high-risk investments.
Overall, bitcoin’s price typically falls when investors (retail and institutional) sell off assets due to economic uncertainty. In these cases, it is also common for investors to sell other uncorrelated assets, such as gold, as well.
Although bitcoin’s price has recently been rising and falling with the stock market, the behavior of bitcoin’s price over many years has shown it to be an uncorrelated asset. Despite recent trends, bitcoin may or may not continue to mimic the stock market in the coming months. There are many possible reasons for bitcoin’s recent correlation with the stock market, but it is important to remember that bitcoin is still a relatively young form of currency, and the behaviors of its price are evolving.