Bitcoin reaches all-time high correlation with S&P 500

Charts from Coin Metrics show that the Pearson correlation between Bitcoin and the S&P 500 reached an all-time high of around 0.5 in mid-March. A correlation of 1 represents perfect positive correlation, a coefficient of 0 represents no correlation, and a coefficient of -1 represents perfect negative correlation.

To better understand what the historical correlation between Bitcoin and major stocks means, LongHash reached out to Spencer Bogart, General Partner at Blockchain Capital, Nic Carter, Co-founder of Castle Island Ventures and Coin Metrics, as well as Kevin Kelly, Co-founder of Delphi Digital.

What has this "digital gold" been through?

Although the price of Bitcoin plummeted after the World Health Organization declared COVID-19 a pandemic, we were not surprised. As we mentioned last month, Bitcoin is a hedge asset against the collapse of the fiat currency system, not a tool to combat economic crises.

"I'm not surprised by the recent correlation between the S&P 500 and Bitcoin, my focus is on the fact that the mathematical correlation between the two has fallen since mid-March," said Nic Carter. "To capture liquidity, investors are converting their short-term assets into long-term assets to add to margins or pay off mortgages. Bitcoin is often the most resilient liquid asset and is not affected by tax benefits, so for many stressed investors, it makes sense to liquidate Bitcoin first."

Spencer Bogart mentioned that during periods of tightening liquidity, asset correlations rise, which he believes has been evident over the past month.

Bogart explained, "During market collapse, all assets show correlation because every liquid asset is being sold for cash. So, in times of extreme chaos, there are no safe haven assets, even mature assets like gold and U.S. bonds are being heavily sold. Bitcoin has been performing well since the beginning of the year, outperforming almost all mainstream assets (except gold and bonds), so I think Bitcoin is gradually transitioning from a speculative asset that many people look down upon to a widely held global currency and store of value."

According to a recent report by Delphi Digital, Bitcoin has outperformed all major assets in the past 12 months.

In response, Kevin Kelly stated, "I don't think the recent sell-off of Bitcoin is cause for too much concern, given the current market conditions. For example, during the period from March to October 2008, after the stock market crash, gold also experienced a 30% drop."

But shouldn't Bitcoin have no correlation with anyone?

Bogart and Kelly pointed out that long-term trends are more important than short-term correlations during an economic crisis.

Bogart said, "Most people are long-term investors, so long-term correlations are more important. We hope to see a diverse range of benefits over the entire period we hold, rather than focusing on trends on a daily/weekly/monthly basis. From a long-term perspective, Bitcoin still has no correlation with most assets."

Kelly added that the recent correlation between Bitcoin and the S&P 500 is not enough to overturn the theory that "Bitcoin has no correlation with other assets."

"We have just witnessed the most volatile period in stock prices in decades, with daily volatility averaging between 3%-5% in a few weeks. In a typical liquidity crisis, few assets can escape massive selling pressure. So, it's not surprising that Bitcoin has experienced a sharp drop. Historically, the market's extreme volatility aligns with the massive sell-offs of Bitcoin and other cryptocurrencies," Kelly said.

Kelly mentioned that the lack of historical correlation between Bitcoin and traditional markets is mainly due to the type of investors in the market, who are typically active in the cryptocurrency market.

"If institutional investors in cryptocurrencies increase, the correlation between Bitcoin and other assets will also rise, as these seasoned veterans will examine and manage their positions in multiple asset portfolios," Kelly said.

What's next?

Although Bitcoin has not been immune to the economic crisis caused by COVID-19, Bogart believes that Bitcoin will continue to shine in the coming years.

He explained, "As we near the end of the worst period in the global market (hopefully), Bitcoin will be a special position. While it faces the same risks of liquidity tightening as all other assets, the impact on Bitcoin will be much smaller in the face of long-term economic resistance we will face in the coming months or years. When the liquidity crisis is over, just as it did at the end of the 2008 economic crisis, the dollars used for marginal investments will return to assets least affected during prolonged economic weakness. I hope Bitcoin will benefit from this trend of asset allocation."

In Kelly's view, after this economic crisis, Bitcoin will demonstrate more of its "digital gold" utility to the world, rather than experiencing another sharp drop like last month.

However, Kelly added that policies to combat COVID-19, in terms of scale and scope, may prolong the timeline for Bitcoin to prove its value.

This article is from our partner LONGHASH