Bitcoin has often been associated with being an uncorrelated asset, behaving similar to commodities exposure. Lately, however, the leading cryptocurrency has been moving in tandem with the broader stock market.
Rising inflation, forthcoming rate hikes, and geopolitical tensions with Russia and Ukraine are no longer moving the major stock market indexes. Cryptocurrencies have also been racked with volatility with the Russia-Ukraine crisis in the forefront of the latest market moves.
“The correlation between crypto and stocks has been high over the last few months on both inflation-related macro news and the Russia-Ukraine geopolitical situation,” said Chris Dick, a quantitative trader at crypto market maker B2C2. “This correlation shows that bitcoin is firmly behaving like a risk asset at the moment — not the safe haven it was touted to be a few years ago.”
So far, the leading cryptocurrency is down 21% on the year. Likewise, the S&P 500 is also down to start the year at 11%.
Influx of Institutional Money
What’s causing the correlation? Is there a causation factor? One potential reason could be the influx of institutional investors, particularly within the past year.
The adoption of the first U.S. bitcoin futures ETF from ProShares helped give the crypto space in general wider adoption. The ProShares Bitcoin Strategy ETF (BITO) can give investors a taste of the digital currency space without the need to expose themselves to the crypto market directly on cryptocurrency exchanges.
For investors who are hesitant on joining cryptocurrency exchanges, BITO allows for access via traditional market exchanges. BITO certainly helped garner more interest in the crypto space and potentially opened the eyes of more institutional investors to the possibility of adding digital assets to their clients’ portfolios.
“The adoption of cryptocurrencies by investors from traditional asset classes is the driving force behind bitcoin’s correlation with equities,” Dick said further. “This relationship has the potential to be broken at any time given the different fundamentals for each market.”
To fully cement its status as digital gold, bitcoin will need wider global adoption. 2021 was the first step after a bullish run that included adoption as legal tender by the country of El Salvador. Similar events can only help bitcoin’s case.
“The fundamentals have always made sense — limited supply currency not affiliated with any nation state,” said Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.
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