Article reprint source: Odaily Planet Daily
Original｜Odaily Planet Daily
Author: jk
Bitcoin's price fluctuations have long shown two completely different trends from traditional financial markets, and there are two completely different narratives behind this: as a risky asset, when market sentiment is high and risk appetite increases, Bitcoin's performance tends to converge with that of U.S. stocks, showing a high positive correlation. This is mainly due to the increased participation of institutional investors, which makes its capital flow pattern similar to that of other high-risk assets. However, when the market panics or risk events break out, Bitcoin will be regarded as a safe-haven asset, decoupled from the trend of U.S. stocks, and even negatively correlated, especially when investors lose confidence in the traditional financial system.
These two narratives make Bitcoin's role more complicated, becoming both a part of risk assets and a possible safe haven asset. Which one will it be? Especially at this point in time when Trump is about to take office?
Price Correlation: More “Safe-Haven” Than U.S. Treasuries
According to TradingView, over the past decade, Bitcoin's correlation with the S&P 500 was 0.17, which is lower than other alternative assets. For example, the S&P Goldman Sachs Commodity Index's correlation with the S&P 500 was 0.42 over the same period. Although Bitcoin's correlation with the stock market has historically been low, it has increased in recent years. In the past five years, its correlation has risen to 0.41.
However, Bitcoin’s strong volatility makes correlation data less reliable: the relationship between Bitcoin and the S&P 500 showed a negative correlation of -0.76 on November 11, 2023 (around the FTX incident), but reached a positive correlation of 0.57 in January 2024.
In contrast, the S&P 500 has performed relatively steadily, with an average annual return of about 9% to 10%, and serves as a benchmark for the U.S. economy. Although the overall return of the S&P 500 may be lower than that of Bitcoin, it wins in stability and low volatility.
Logarithmic comparison of Bitcoin and Nasdaq. Source: FRED
It can be seen that when macro hot events occur, the two usually have a strong correlation: for example, during the market recovery after the new crown epidemic in 2020, both showed a significant upward trend. This may reflect increased investor demand for risk assets in the context of loose monetary policy.
However, in other time periods (such as 2022), the trends of Bitcoin and Nasdaq differed greatly, showing a weakening of correlation, especially in time periods when black swan events occurred only in the crypto market, Bitcoin experienced a unilateral plunge.
Of course, in terms of cyclical returns, Bitcoin can definitely beat the Nasdaq by three blocks. However, judging from the price correlation data alone, the correlation between the two is indeed increasing.
A report released by WisdomTree also mentioned a similar point of view. The report's point of view is: Although the correlation between Bitcoin and U.S. stocks is not high in absolute terms, in the near future this correlation is lower than the correlation between the returns of the S&P 500 index and U.S. Treasury bonds.
Trillions of dollars of assets around the world are benchmarked to the S&P 500 or attempt to track its performance, making it one of the most watched indices in the world. If you can find an asset that has a -1.0 (perfectly inverse) and relatively stable correlation between its returns and the S&P 500, then this asset will be highly sought after. This property means that when the S&P 500 performs negatively, this asset has the potential to provide positive returns, demonstrating hedging properties.
While stocks are often viewed as risky assets, U.S. Treasuries are considered by many to be closer to a "risk-free" asset. The U.S. government can print money to meet its debt obligations, although the market value of U.S. Treasuries, especially those with longer maturities, can still fluctuate. An important point of discussion in 2024 is that the correlation coefficient between the S&P 500 and U.S. Treasuries is approaching 1.0 (a positive correlation of 1.0). This means that both asset classes can rise or fall at the same time in the same time frame.
Assets rising or falling at the same time is the exact opposite of the original purpose of hedging. This phenomenon is similar to 2022, when stocks and bonds recorded negative returns at the same time, which violated many investors' expectations of risk diversification.
Bitcoin does not currently exhibit a strong ability to hedge against S&P 500 returns. From the data point of view, the correlation between Bitcoin and the S&P 500 Index is not significant. However, Bitcoin’s recent return correlation with the S&P 500 has been lower than the S&P 500’s return correlation with U.S. Treasuries. If this trend continues, Bitcoin will attract the attention of more asset allocators and investors and gradually become a more attractive investment tool over time.
From this perspective, compared with the risk-free asset U.S. Treasuries, Bitcoin only needs to be a safe-haven asset that "runs faster than U.S. Treasuries", and investors will naturally choose Bitcoin as an item in their investment portfolio.
The chart shows the 50-day rolling correlation between Bitcoin price 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: ETFs account for an increasing proportion
The role of institutional investors in the Bitcoin market is increasingly important. So far, the distribution of Bitcoin positions shows a significant increase in the influence of institutions on its market. This concentration trend may further promote the correlation between Bitcoin and US stock trends. The following is a specific analysis:
According to data, 19.9 million bitcoins have been mined so far, with a total of 21 million, so there are 1.1 million bitcoins left to be mined.
Among the mined bitcoins, the top 1,000 dormant addresses for more than five years hold 9.15%, equivalent to about 1.82 million bitcoins. This portion of bitcoins usually does not enter the circulation market, which actually reduces the active supply in the market.
In addition, according to Coingecko data, the top 20 listed companies including Microstrategy hold 2.63% of the total bitcoins, or about 520,000 bitcoins. Microstrategy alone holds 2.12% of the total bitcoins (about 440,000 bitcoins).
On the other hand, according to data from The Block, as of the time of writing this article, institutional holdings of all ETFs currently reach 1.17 million.
If we assume that the number of dormant bitcoins, unmined bitcoins, and the number of bitcoins held by listed companies remain unchanged, then the theoretical circulation in the market = 1990 - 182 - 52 = 17.56 million bitcoins
Institutional holdings: 6.67%
It can be seen that ETF institutions currently control 6.67% of Bitcoin circulation, and this proportion may further increase in the future as more institutions get involved. From the same period last year to this year, we can find that the share from exchanges has been significantly compressed, while the share from ETFs has further grown.
Bitcoin holdings. Source: CryptoQuant
Similar to U.S. stocks, when institutional investors gradually increase their share of market positions, investment decision-making behaviors (such as increasing or decreasing holdings) will play a more critical role in price fluctuations. This market concentration phenomenon can easily cause Bitcoin price trends to be significantly affected by U.S. stock market sentiment, especially the flow of investment funds driven by macroeconomic events.
The process of Americanization
The impact of U.S. policy on the Bitcoin market is increasingly significant. As for this issue, there are more unknowns at present: according to Trump’s current acting style, if encryption-friendly people occupy important decision-making positions at key policy nodes in the future, such as promoting a looser regulatory environment or approving more and Bitcoin-related financial products, the adoption rate of Bitcoin is bound to further increase. This deepening of adoption will not only solidify Bitcoin’s status as a mainstream asset, but may also further narrow the correlation between Bitcoin and U.S. stocks, two assets that reflect the direction of the U.S. economy.
To sum up, the correlation with U.S. stocks is gradually increasing. The main reasons include the common reaction of prices to macro events, the significant impact of institutional positions on the market, and the potential impact of U.S. policy trends on the market. From this perspective, we can indeed use the trend of US stocks in the future to judge more trends for Bitcoin.
