【Full Text of Coinbase Blog】Bitcoin's Decoupling from "Unrelated Assets" May Just Be Temporary

The U.S. cryptocurrency exchange giant Coinbase explains through historical data the recent phenomenon of Bitcoin showing a positive correlation with the U.S. stock market, and attempts to explain that this is only temporary.

This article is translated from the original "Bitcoin’s Uncoupling from 'Uncorrelated'", sourced from Coinbase's blog on March 20th.

In one sentence: Although historically Bitcoin has recently fallen alongside the S&P 500 index, the recent positive correlation may be temporary.

From an article in The Economist before the financial crisis of November 18, 2007:

"Since the stock bear market of 2001-2002, institutional investors have been looking for 'uncorrelated assets.' They realized they had bet too heavily on the stock market and wanted diversified investments. But government bonds and cash couldn't provide the returns they sought."

Uncorrelated assets fluctuate independently of major stock market indices, potentially providing savvy investors with an opportunity to counter market trends. For years, Bitcoin has been generally considered an "uncorrelated asset." Overall, this is statistically correct.

To prove this point, using a statistical method called "correlation coefficient," Bitcoin's price has largely remained independent of fluctuations in the US S&P 500 index throughout most of its historical records. However, recently Bitcoin has shown a positive correlation in declining alongside the S&P 500 index.

Let's quickly understand the correlation coefficient. A coefficient of 1.00 indicates two assets moving in sync or representing a positive correlation. A coefficient of -1.00 indicates two assets moving inversely or representing a negative correlation (i.e., BTC falling when the S&P 500 rises, and vice versa). The historical correlation between Bitcoin and the S&P 500 index fluctuates between 1.00 and -1.00, sometimes appearing positively correlated, while at other times, negatively correlated. This means that BTC has historically remained unrelated to major stock market indices.

As an example of two positively correlated assets in traditional markets, here are the S&P 500 index and the Dow Jones Industrial Average:

As an example of two positively correlated assets in the cryptocurrency market, here are Bitcoin and Ethereum:

While there is a brief negative correlation, Ethereum's price typically moves in sync with Bitcoin.

Last week, global markets plummeted, with Bitcoin experiencing a significant drop alongside the S&P 500 index. In traditional markets, global exchanges used trading halts to prevent sell-offs. Bitcoin has operated normally 99.98% of the time since its creation on January 3, 2009. Furthermore, Bitcoin's spot market liquidity is global, decentralized, and operates around the clock.

Indeed, amidst the current global market turmoil, BTC has a year-to-date return of -13.2%, while the S&P 500 index stands at -25.1%. It is noteworthy that Bitcoin's volatility is significantly higher than the S&P 500 index. However, when calculating the 10-day volatility, the S&P 500 index has recently surged to levels that align with Bitcoin's usual range. In recent days, the volatility of the S&P 500 index has greatly increased, and so has BTC's.

Despite the high volatility, as the world enters unknown economic, monetary, and fiscal territories, the advantages of Bitcoin may become more apparent. Bitcoin is a globally accessible, permissionless, and scarce asset, offering a chance to prove its value.

If Bitcoin's historical chart is a reliable indicator, then the recent instances of positive correlation with the S&P 500 index may only be temporary. On the other hand, if the correlation with the S&P 500 index continues to be long-term... Bitcoin will enter uncharted territory.

References

• The Economist: "The New Small Thing" (November 18, 2007)
• Investopedia: "Correlation Coefficient" (February 19, 2020)
• Bitcoin Uptime (Checked on March 19, 2020)

Further Reading

• Inflation is Coming: The Biggest Opportunity in Bitcoin's Brief History
  
• Bridgewater Fund is Down 20% this Year: A Look Back at Founder Dalio's Predictions of No Recession and Ineffective Rate Cuts

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