Bitcoin: The crypto's correlation with the stock market has decreased

It is traditionally accepted that Bitcoin (BTC) maintains a correlation with the stock market in terms of movement. However, this link, while still present, is no longer as strong as previously thought. A crypto expert reveals that Bitcoin’s correlation with the S&P 500 is now negative.

The Weakening of the Bitcoin-Stock Link?

In a recent post on social media, Jurrien Timmer, an executive at Fidelity, shared an interesting perspective regarding Bitcoin. The flagship cryptocurrency now shows a “predominant negative correlation” with the S&P 500, a benchmark stock index.

In other words, the two assets, known for following similar trajectories together, tend to move in opposite directions most of the time. That is, when one increases, the other tends to decrease, and vice versa.

This revelation is particularly significant for investors, especially those who adhere to the traditional 60/40 portfolio allocation strategy. It highlights that Bitcoin’s correlation with stocks has substantially diminished, as has its annualized volatility.

This development also indicates Bitcoin’s potential as a more attractive option for portfolio diversification. However, it must be recognized that this introduces complexities for crypto traders, as Bitcoin’s price movements may not align with those of stocks based on macroeconomic indicators.

Fidelity Exec Shares Surprising Fact About Bitcoin https://t.co/H4e2qrS9FC

— Nanette Wilson (@Nanette86951434) April 4, 2024

A Process That Began in 2022

It should be noted that this change in the correlation between Bitcoin and stocks is not a recent development. Experts trace its inception to 2022, a year marked by efforts by the Federal Reserve to combat inflation through interest rate hikes.

For instance, in March 2022, the correlation between Bitcoin and the S&P 500 peaked at close to 0.50, reaching its highest level since 2020. This was a challenging shift for Bitcoin proponents who viewed it as a means of diversifying their portfolio, capable of operating independently from traditional asset classes.

Moreover, the notion of Bitcoin as an “inflation hedge” has been met with skepticism. This is because the leading cryptocurrency has behaved more like a conventional risk asset.

However, the dynamics between the two assets took a new turn in 2023. In March of that year, research firm K33 observed a decline in the correlation. This situation once again positioned Bitcoin as an attractive investment choice for its potential to serve as a relevant means of diversifying a portfolio. An expert predicted a potential restoration of the correlation between Bitcoin’s price and stocks, especially with the introduction of several spot Bitcoin ETFs earlier that year.