Is Bitcoin still Correlated with the Stock Market?

Bitcoin is often accused of being a poor store of value due to its weaknesses during market downturns. So what ?

Factual correlation between Bitcoin and the stock market

The correlation between Bitcoin and the American stock market has resurfaced recently. It was particularly noticeable on Monday, August 5, when the S&P 500 fell by nearly 5%.

This was enough for Nassim Taleb to once again explain that Bitcoin is neither a store of value nor digital gold:

Nassim Taleb says Bitcoin could skyrocket to a million! 💥 Watch as CNBC host Joe Kernan engages in a heated debate with Taleb over the true value of #Bitcoin. 🔥📈 #Crypto #Blockchain #BTC #Finance pic.twitter.com/3fekuc6HMl

— AIFinInsights (@aifininsights) August 18, 2024

NYDIG looked into the issue by comparing the performance of Bitcoin to that of gold and US Treasury bonds. That is, assets to which investors might quickly turn during times of stress. To do this, NYDIG examined the largest daily declines in the S&P 500 index since 2011 to make comparisons.

One of the main takeaways from this analysis is that US Treasury bonds serve as a safe haven in case of stock market declines. They appreciated 72% of the time when the stock market fell sharply. The appreciation was an average of 0.74% for the day.

In contrast, the average appreciation of gold was meager (+0.01%). The “barbarous relic” only appreciated 56% of the time. In other words, gold is much less effective than Treasury bonds in hedging against market declines.

As for Bitcoin, it also does not serve as a hedge in the event of a sharp drop in the stock market. The correlation is positive, although relatively weak.

While Bitcoin may offer some advantages as a hedge in a portfolio, it is not effective against the significant daily declines of the S&P 500.

And during drawdowns?

A drawdown refers to the decline of an asset (such as the S&P 500) from its peak before it recovers to its highest level. It is essentially a percentage measure of downward volatility. Drawdowns can last for several weeks, months, or years.

Here is, for example, a chart of drawdowns for Bitcoin (purple) and the S&P 500 (green) since January 2015:

It's funny when bitcoin bulls are permabears on the stock market and US economy. If the US market goes through a severe drawdown, what do you think is going to happen to bitcoin? pic.twitter.com/BKT6fNN3r0

— ValueStockGeek (@ValueStockGeek) August 14, 2024

NYDIG reviewed all drawdowns of the S&P 500 greater than 5% since the beginning of 2011. The conclusions are largely the same.

Gold remains an unreliable hedge, while US Treasury bonds (long-term) remain the best hedge in every respect.

The same is true for Bitcoin, which shines significantly when the stock market makes a comeback. On this note, it is worth mentioning that the S&P 500 is currently on the verge of reaching a new all-time high.

To summarize, Bitcoin is not a hedge against the whims of the stock market. NYDIG believes this is due to the fact that Bitcoin is a highly liquid market that never closes:

“Our theory is that Bitcoin’s high liquidity allows investors to express their opinions outside of traditional market hours (recent price movements over the weekend have been very telling). It’s important to keep in mind that the correlations and price fluctuations of Bitcoin are merely reflections of collective human behavior, rather than inherent characteristics of the asset itself,” says NYDIG.

Bitcoin is intrinsically the best store of value in human history. Its high volatility is a modest price to pay for those who have the good fortune to invest early.

Finally, it should be noted that all investors face a wide range of risks. Even keeping money under the mattress carries risks such as inflation. It has been 25% over the past three years. Meanwhile, Bitcoin has appreciated by 25%…