Written by: jk, Odaily Planet Daily
The price fluctuations of Bitcoin have long shown two completely different trends compared to traditional financial markets, which are based on two entirely different narratives: as a risk asset, during periods of high market sentiment and increased risk appetite, Bitcoin's performance often aligns with U.S. stocks, showing a high positive correlation. This is primarily due to the increased participation of institutional investors, making its capital flow patterns similar to other high-risk assets. However, during market panic or risk events, Bitcoin is often viewed as a safe-haven asset, decoupling from U.S. stock trends and even showing negative correlation, especially when investors lose confidence in the traditional financial system.
These two narratives make Bitcoin's role more complex, being part of risk assets while also potentially playing the role of a safe-haven asset. Which will it be? Especially at this moment when Trump is about to take office?
Price correlation: more 'safe-haven' than U.S. Treasuries.
According to statistics from TradingView, over the past decade, the correlation between Bitcoin and the S&P 500 index has been 0.17, lower than other alternative assets. For example, the correlation between the S&P Goldman Sachs Commodity Index and the S&P 500 during the same period was 0.42. Although Bitcoin's correlation with the stock market has historically been low, this correlation has increased in recent years, rising to 0.41 over the past five years.
However, Bitcoin's strong volatility makes correlation data less reliable: the relationship between Bitcoin and the S&P 500 was noted as -0.76 negative correlation on November 11, 2023 (around the FTX event), but by January 2024 it had reached a positive correlation of 0.57.
In contrast, the S&P 500 has performed relatively stable, with an annual return rate of about 9% to 10%, serving as a benchmark for the U.S. economy. Although the overall return rate of the S&P 500 may be lower than that of Bitcoin, it excels in stability and lower volatility.
Logarithmic comparison of Bitcoin and Nasdaq index. Source: FRED.
It can be observed that during macro hot events, there is usually a strong correlation between the two: for example, during the market recovery period after the COVID-19 pandemic in 2020, both showed significant upward trends. This may reflect an increase in investor demand for risk assets in the context of loose monetary policy.
However, during other time periods (such as 2022), the trend of Bitcoin and the Nasdaq differed significantly, showing a weakening of correlation, especially during periods of black swan events that occurred solely in the crypto market, when Bitcoin experienced a unilateral crash.
Of course, in terms of periodic returns, Bitcoin can easily outperform the Nasdaq by a wide margin. However, purely from the perspective of price correlation data, the correlation between the two is indeed increasing.
A report from WisdomTree also mentioned a similar viewpoint, stating that despite the low absolute correlation between Bitcoin and U.S. stocks, recently this correlation is lower than that between the S&P 500 index and U.S. Treasury returns.
Globally, trillions of dollars in assets use the S&P 500 index as a benchmark or attempt to track its performance, making it one of the most closely watched indices in the world. If an asset can be found with a return rate correlated at -1.0 (completely inverse) and relatively stable to the S&P 500 index, it will be highly sought after. This characteristic means that when the S&P 500 index shows negative performance, this asset could potentially provide positive returns, demonstrating hedging characteristics.
Although stocks are generally considered risk assets, U.S. Treasuries are regarded by many as closer to 'risk-free' assets. The U.S. government can fulfill its debt obligations by printing money, although U.S. Treasuries, especially long-term bonds, may still have fluctuations in market value. An important discussion point for 2024 is that the correlation coefficient between the S&P 500 index and U.S. Treasuries is approaching 1.0 (positive correlation 1.0). This means that the two asset categories may rise or fall simultaneously over the same period.
Simultaneous rises or falls of assets are completely opposite to the purpose of hedging. This phenomenon is similar to 2022, when both stocks and bonds recorded negative yields, contradicting many investors' expectations for risk diversification.
Bitcoin has not shown a strong ability to hedge against the returns of the S&P 500 index. From the data, the correlation between Bitcoin and the S&P 500 index is not significant. However, recently the return correlation between Bitcoin and the S&P 500 index is lower than that between the S&P 500 index and U.S. Treasury returns. If this trend continues, Bitcoin will attract more attention from asset allocators and investors and gradually become a more attractive investment tool over time.
From this perspective, compared to the risk-free U.S. Treasuries, Bitcoin only needs to be the 'asset that runs faster than U.S. Treasuries' to be a safe-haven asset, and investors will naturally choose Bitcoin as part of their investment portfolio.
The chart shows the 50-day rolling correlation between Bitcoin prices and the S&P 500 index in 2022. On average, the correlation is about 0.1, with highs exceeding 0.4 and lows below -0.1. Source: WisdomTree.
Institutional holdings: The proportion of ETFs is increasing.
The role of institutional investors in the Bitcoin market is becoming increasingly important. As of now, Bitcoin’s holding distribution shows a significant increase in institutional influence over its market, and this centralization trend may further drive the correlation between Bitcoin and U.S. stock trends. Here is a specific analysis:
According to the data, 19.90 million Bitcoins have been mined so far, with a total supply of 21 million, leaving 1.10 million yet to be mined.
Among the mined Bitcoins, the holdings of the top 1,000 dormant addresses with over 5 years of inactivity account for 9.15%, equivalent to about 1.82 million. This portion of Bitcoin usually does not enter the circulating market, effectively reducing the active supply in the market.
Additionally, according to Coingecko data, the holdings of the top 20 listed companies, including Microstrategy, account for 2.63%, approximately 520,000, of which Microstrategy alone holds 2.12% of the total Bitcoin supply (about 440,000).
On the other hand, according to data from The Block, as of the time of writing this article, institutional holdings of all ETFs currently reached 1.17 million.
If we assume that the Bitcoin in dormant addresses, the unmined quantity, and the holdings of listed companies remain unchanged, then the theoretical circulating supply in the market = 19.90 million - 1.82 million - 0.52 million = 17.56 million.
Institutional holdings proportion: 6.67%
Thus, it can be seen that ETFs currently control 6.67% of Bitcoin’s circulating supply, and this proportion may further increase in the future as more institutions get involved. From the same period last year to this year, we observe a significant compression of shares from exchanges, while shares from ETFs have further grown.
Bitcoin holdings proportion. Source: CryptoQuant.
Similar to U.S. stocks, when the proportion of institutional investors' holdings in the market gradually increases, investment decision behaviors (such as increasing or decreasing positions) play a more critical role in price fluctuations. This phenomenon of market centralization tends to cause Bitcoin’s price movements to be significantly influenced by the sentiment of the U.S. stock market, especially in the flow of investment funds driven by macroeconomic events.
The process of 'Americanization'
The impact of U.S. policy on the Bitcoin market is becoming increasingly significant. In this regard, there are currently more unknowns: based on Trump's current style of operation, if in the future key policy nodes, crypto-friendly individuals occupy important decision-making positions, such as promoting a looser regulatory environment or approving more Bitcoin-related financial products, the adoption rate of Bitcoin will inevitably increase further. This deepening of adoption will not only solidify Bitcoin's position as a mainstream asset but may also further narrow the correlation between Bitcoin and U.S. stocks, both of which reflect the direction of the U.S. economy.
In summary, the correlation with U.S. stocks is gradually strengthening, mainly due to the joint response of prices to macro events, the significant impact of institutional holdings on the market, and the potential influence of U.S. policy trends on the market. From this perspective, we can indeed use the trends of U.S. stocks to infer more about the trends of Bitcoin in the future.
