Andrew Kang on the correlation between crypto and stock markets: Suggests Air Force to trade stocks instead

Mechanism co-founder Andrew Kang today shared his thoughts on the correlation between the cryptocurrency and stock markets, explaining why the correlation between the two is continuing to decline in the current bear market. Additionally, he advised bearish market participants not to trade cryptocurrencies and suggested that stocks might be a better option.

1/ The most common pushback I've heard over the last month against the bull view is concern around equities. Find this to be a weak argument considering

Crypto-Equities correlation is now noise

Data shows that we've dropped to statistically insignificant levels of pre-2020 pic.twitter.com/96PU9tzdCm

— Andrew Kang (@Rewkang) October 4, 2023

Why Was There a High Correlation Between Cryptocurrency and Stock Markets?

Andrew Kang, formerly of X, stated on Twitter that the most common bearish sentiment he heard in the past month revolved around the stock market. However, he believed this view was weak and deemed the correlation between cryptocurrency and the stock market as noise.

The chart below shows the correlation coefficients between Bitcoin and the S&P 500 over the past few years. It can be seen that the correlation coefficient reached above 0.6 in mid-2022, but currently, Andrew believes it has dropped to a level that is not statistically significant, similar to before 2020.

Andrew reasoned from a first-principles perspective and summarized two points on why there was once a correlation between cryptocurrency and the stock market:

1. Crossover funds such as Cotue, Tiger, and individual investment portfolios heavily invested in tech stocks and cryptocurrencies, creating wealth effects and reverse wealth effects.
2. More quantitative traders entering the field and deploying trading algorithms that enhance correlation.

Andrew Kang's Recommendation: Bears Should Trade Stocks

However, the current market situation has shown the opposite. Crossover and quantitative funds have reduced trading since mid-2020, and the cryptocurrency market has demonstrated its unique advantages and disadvantages by the end of 2022, making correlation trading unprofitable in 2023.

Therefore, Andrew believes that unless the above situation changes, the correlation coefficient between the two markets will continue to decrease. However, Andrew also mentioned that if another black swan event like Covid were to occur again, or if the Fed were to implement Yield Curve Control (YCC), funds would re-enter the market, gradually bringing the correlation coefficient back to 1.

Finally, Andrew recommended that bearish market participants refrain from trading cryptocurrencies and consider stocks as a better option.

His reasoning was that since September this year, the S&P 500 has fallen by 7%, while Bitcoin has increased by 10%, with some competing coins even experiencing higher increases.