What is the Correlation Between Crypto and Stocks?
According to a recent survey performed by Fidelity Digital Assets, 47% of institutional investors in the U.S. identified that the most appealing aspect of digital assets is that they are seen to be uncorrelated to other assets. Low correlation is important for institutional investors, who typically manage multi-asset portfolios, because it is thought that assets being uncorrelated to each other can potentially enhance portfolio diversification.
Correlation measures the degree to which two assets have moved in tandem with each other over some defined time period. A correlation of 1 would indicate perfect positive correlation – the two asset classes move in lock-step with each other. Similarly, a correlation of -1 indicates perfect negative correlation – when one goes up the other has an equal movement down. Does Bitcoin’s price and that of other blockchain assets like Ethereum move in tandem with the stock market?
The Crypto Market and the Stock Market
According to a recent study published by the IMF, crypto and stocks have become much more correlated over time, having increased significantly in the time period of 2020-2021 from 2017-2019. In the study, the researchers included the crypto assets Bitcoin, Ether, and Tether and the stock indices S&P 500, Nasdaq, Russell 2000, and MSCI EM.
The study goes on to say that from Jan 2017 to Dec 2019, the volatility correlation between Bitcoin and the S&P 500 was .11, and expanded to .46 in the time period from Jan 2020 to Nov 2021, while the return correlation moved from .01 to .36. In the same two time periods, the volatility correlation between Ether and the S&P 500 moved from .08 to .25, while the return correlation moved from .06 to .37.
The author of the study suggested a few possible reasons why the correlation between these crypto currencies and the stock market has increased. For one, the time period between 2020 and 2021 was one of particularly easy financial conditions as central banks globally worked to stave off the negative impacts of the COVID-19 pandemic. Additionally, the level of investor adoption of crypto assets has expanded significantly, growing from $20 billion in January 2017 to more than $3 trillion in November 2021.
Publications like Morningstar and Bloomberg have also pointed out the increasing correlation between bitcoin and the stock market in recent months. In its write-up, Morningstar cited a correlation of .33 between BTC and stocks (measured by the Morningstar U.S. Market Index) for the 36-month period ended Sept. 30, 2021. Meanwhile, on January 21, 2022 Bloomberg noted a 100-day correlation of .4 between the Nasdaq 100 and Bitcoin.
While there have been fewer headlines discussing the correlation between Ether and stocks, Bloomberg recently stated ETH is “now moving in tandem with U.S. stocks like never before.” The company cited a .65 40-day correlation coefficient for the token and the S&P 500 – a relatively short time frame, but still a high level of correlation.
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