Markets
Are cryptocurrencies and stock markets still separate? By U.Today
U.Today –
BTC as a source of diversification
it is known for its extreme volatility, with significant price swings like a roller coaster ride: plummeting over 64% in 2022 before rising 160% in 2023. This volatility can be challenging for cryptocurrency traders.
On the other hand, the S&P 500 offers more stable performance, with average annual returns between 9% and 10%, and serves as a benchmark for the US economy. Despite lower returns than Bitcoin, the consistency and reliability of the S&P 500 make it a prime choice for risk-averse investors seeking predictable investment results.
According to Glassnode, cryptocurrency allocations can diversify risk and improve returns in traditional portfolios.
For example, adding small allocations to the Coinbase (NASDAQ:) Core Index (COINCORE), a market cap-weighted crypto index composed primarily of Bitcoin (70.9%) and Ether (21.9%), to a 60% portfolio /40 (60% MSCI ACWI and 40% US Agg) increased both absolute and risk-adjusted returns over a five-year period ending March 31, 2024.
Excellent performance in the first quarter
According to the joint Coinbase and Glassnode report, Bitcoin (BTC) had an impressive first quarter in 2024, returning 69% and outperforming most traditional asset classes.
Despite the launch of BTC ETFs, which many thought would lead to a stronger correlation with traditional financial assets, BTC showed minimal correlation with major asset classes, using data from a recent Glassnode and Coinbase Institutional report. This suggests its potential as a valuable component for diversification within a portfolio.
Bitcoin had a negative correlation with the DXY index and gold, while its correlation with the S&P 500 was low at 0.11. This suggests that Bitcoin’s price movements are largely independent of traditional markets.
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However, at the start of the second quarter, BTC fell 15% from its highs, coinciding with the DXY index rising above 106, further highlighting the negative correlation between the two.
The second quarter report also noted a decrease in Bitcoin volatility since January 2020, with less pronounced spikes. While volatility is currently just under 60%, the report highlights a long-term downward trajectory despite occasional spikes above the trend line, primarily during 2020 and 2021.
As Bitcoin continues to mature into a major asset class, its volatility is expected to continue to decline over time.
Why the stock market matters
According to Tastylive research, in general, there is little correlation between Bitcoin and the S&P 500, except during significant Bitcoin price movements (+5% or more on the upside, or less than -5% on the downside).
When Bitcoin price movement exceeds 5%:
- S&P 500 average change: 0.42%.
- S&P 500 median change: 0.19%.
- Standard deviation: 1.53%.
- Average change in the S&P 500 index: -0.67%.
- S&P 500 median change: -0.34%.
- Standard deviation: 2.31%.
- Average change in the S&P 500 index: 0.09%.
- S&P 500 median change: 0.11%.
- Standard deviation: 1.11%.
This has created a favorable environment for risk-on trading, leading to bullish rallies for both Bitcoin and the S&P 500 Index despite bearish sentiment following the 2022 correction.
As Bitcoin’s correlation with traditional stock markets like the S&P 500 and Nasdaq increases while its correlation with gold decreases, this suggests that Bitcoin is behaving more like a risk asset rather than a safe haven.
When investors are feeling adventurous, they often gravitate towards digital stocks and coins for the potential for higher profits.
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The growing involvement of institutional and retail investors in both stock and cryptocurrency markets could lead to simultaneous buying and selling decisions, aligning the price movements of these assets.