Bitcoin and other cryptocurrencies are consider alternative assets comparable to commodities and other “alts.” That implies digital currencies should not move in concert with traditional asset classes, such as stocks and bonds.
Indeed, there are times when the digital currency’s price action departs from equities. But there are also occasions when it is closely linked to well-known equity benchmarks, including the Nasdaq-100 Index (NDX). That’s the underlying gauge for the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
As Kevin Davitt, head of options content at Nasdaq, noted, the long-running correlation between bitcoin and NDX is 0.805. That’s fairly high, but there are occasions when that linkage breaks down. And that potentially providies investors with opportunity in QQQ, QQQM, and bitcoin.
When Bitcoin and NDX Correlations Shift
History can be instructive for investors looking for clues regarding how the bitcoin/NDX relationship can affect exchange traded funds such as QQQ and QQQM.
“It was most pronounced in late 2019 and mid-2021. In those situations, the correlation fell to -0.65. During those lookback periods, the NDX and spot bitcoin often moved in opposite directions,” noted Davitt. “In short, the 90-day correlations became negative during/following significant bitcoin drawdowns.”
Recently, that situation has reversed, as the digital currency and NDX have risen in unison since the fourth quarter. That could be a symptom of some QQQ and QQQM holdings being viewed as crypto-correlated, the recent approval of spot bitcoin ETFs in the U.S., or a combination of the two.
“The three-month correlation between the two indexes is highly positive. The correlation measure vacillated between 0.64 in May of 2021 and above 0.99. Most of the time, the 90-day correlation is above 90%,” added Davitt.
Periods of intimate linkages between bitcoin and NDX aren’t surprising. QQQ and QQQM allocate nearly half their rosters to tech stocks, some of which have clear ties to the cryptocurrency space. Bitcoin itself is viewed as a technology, which could be a variable that enhances its correlations to NDX.
One way of looking at the above is that there are times when opportunity presents itself to tactical traders vis a vis the bitcoin/NDX relationship.
“Capital markets are constantly evolving, and the bitcoin saga is just another example. Dynamic markets respond to end-user demand. The growth of cryptocurrency and index option markets over the past few years is representative of that dynamism,” concluded Davitt.
On the other hand, more conservative investors can simply embrace QQQ or QQQM as backdoor avenues to exposure to the digital currency without the associated volatility.
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