Original title: (Will Bitcoin, once incorporated, eventually become another form of U.S. stock?)
Original author: jk, Odaily Planet Daily
Bitcoin's price volatility has long exhibited two entirely different trends compared to traditional financial markets, driven by two completely different narratives: as a risk asset, when market sentiment is high and risk appetite increases, Bitcoin often performs similarly to 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 those of other high-risk assets. However, during market panic or risk events, Bitcoin is viewed as a safe-haven asset, decoupling from U.S. stock market trends, and even exhibiting negative correlation, especially when investors lose confidence in the traditional financial system.
These two narratives make Bitcoin's role more complex, as it becomes part of risk assets while also potentially playing the role of a safe-haven asset. Which one will it be? Especially at this time when Trump is about to take office?
Price correlation: More 'safe-haven' than U.S. Treasury bonds.
According to TradingView statistics, over the past decade, the correlation between Bitcoin and the S&P 500 index has been 0.17, lower than that of 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 the correlation between Bitcoin and the stock market has historically been low, it has increased in recent years, rising to 0.41 in the past five years.
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 by January 2024, it had reached a positive correlation of 0.57.
In contrast, the S&P 500 has shown relative stability, with an annual average return of about 9% to 10%, serving 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 benefits from stability and lower volatility.
A logarithmic comparison between Bitcoin and the Nasdaq index. Source: FRED.
It can be seen that during macro hot events, the two usually exhibit strong correlation: for example, during the market recovery period after the COVID-19 pandemic in 2020, both saw significant upward trends. This may reflect increased demand for risk assets in the context of loose monetary policy.
However, during other periods (such as 2022), the trends of Bitcoin and the Nasdaq differ significantly, showing a weakening of correlation, especially during periods of black swan events specific to the crypto market, when Bitcoin may experience a sharp decline.
Of course, in terms of periodic returns, Bitcoin can easily outperform the Nasdaq by a wide margin. However, purely in terms of price correlation data, the correlation between the two is indeed increasing.
A report released by WisdomTree also mentioned a similar viewpoint, stating that although the correlation between Bitcoin and U.S. stocks is not high in absolute terms, it has recently been lower than the correlation of returns between the S&P 500 index and U.S. Treasury bonds.
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 that has a -1.0 (perfect inverse) and relatively stable correlation with the S&P 500 index, it will be highly sought after. This characteristic means that when the S&P 500 index performs negatively, this asset has the potential to provide positive returns, demonstrating a hedging feature.
Although stocks are generally viewed as risk assets, U.S. Treasury bonds are considered closer to 'risk-free' assets by many. The U.S. government can fulfill its debt obligations by printing money, although the market value of U.S. Treasury bonds, particularly those with longer maturities, may still fluctuate. An important discussion point for 2024 is that the correlation coefficient between the S&P 500 index and U.S. Treasury bonds is approaching 1.0 (perfect positive correlation). This means that the two asset classes may rise or fall simultaneously during the same time period.
Assets rising or falling together is the opposite of the original intention of hedging. This phenomenon is similar to 2022 when both stocks and bonds recorded negative returns, contrary to many investors' expectations of diversifying risk.
Currently, Bitcoin does not exhibit strong hedging capabilities against the S&P 500 index return. The data indicates that the correlation between Bitcoin and the S&P 500 index is not significant. However, the recent correlation of returns between Bitcoin and the S&P 500 index is lower than that between the S&P 500 index and U.S. Treasury bonds. If this trend continues, Bitcoin will attract more asset allocators and investors' attention, gradually becoming a more attractive investment tool over time.
From this perspective, compared to the risk-free U.S. Treasury bonds, Bitcoin only needs to be the 'safe-haven asset that runs faster than U.S. Treasury bonds' for investors to 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, peaking above 0.4 and dipping below -0.1. Source: WisdomTree
Institutional holdings: The percentage of ETFs is increasing.
The role of institutional investors in the Bitcoin market is becoming increasingly important. As of now, the distribution of Bitcoin holdings shows a significant increase in institutional influence on the market, and this trend of centralization may further drive the correlation between Bitcoin and U.S. stock movements. Here is a specific analysis:
According to data, 19.9 million Bitcoins have been mined so far, out of a total supply of 21 million, leaving 1.1 million yet to be mined.
Of the Bitcoins that have been mined, over 9.15% of the holdings are from the top 1,000 dormant addresses that have been inactive for more than 5 years, equivalent to about 1.82 million Bitcoins. This portion of Bitcoin typically does not enter the circulating market, effectively reducing the active supply in the market.
Additionally, according to Coingecko data, the top 20 listed companies, including Microstrategy, hold a share of 2.63%, which is about 520,000 Bitcoins, of which Microstrategy alone holds 2.12% of the total Bitcoin supply (approximately 440,000 Bitcoins).
On the other hand, according to data from The Block, as of the time of writing this article, all ETF institutional holdings have reached 1.17 million Bitcoins.
· If we assume that the Bitcoins in dormant addresses, the unmined quantity, and the holdings of listed companies remain unchanged, then the theoretical circulating supply in the market = 1990 - 182 - 52 = 17.56 million Bitcoins.
· Institutional holdings percentage: 6.67%
As can be seen, ETF institutions currently control 6.67% of Bitcoin's circulating supply, and this percentage may further increase in the future as more institutions get involved. From the same period last year to this year, we can observe a significant compression of the share from exchanges, while the share from ETFs has further increased.
Bitcoin holding percentage. Source: CryptoQuant.
Similar to U.S. stocks, as institutional investors gradually increase their holdings in the market, investment decision-making behaviors (such as increasing or reducing holdings) will play a more critical role in price fluctuations. This market centralization phenomenon can lead to Bitcoin's price movements being significantly influenced by the sentiment of the U.S. stock market, especially during capital flows driven by macroeconomic events.
The 'Americanization' process.
U.S. policy is increasingly impacting the Bitcoin market. This topic remains largely uncertain: based on Trump's current style of governance, if pro-crypto individuals occupy important decision-making positions at critical policy junctures in the future, such as advocating a more lenient regulatory environment or approving more Bitcoin-related financial products, the adoption rate of Bitcoin is bound to increase. This deepening adoption would not only solidify Bitcoin's status as a mainstream asset but could also further bridge 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 increasing, primarily due to the common response of prices to macro events, the significant influence of institutional holdings on the market, and the potential impact of U.S. policy trends on the market. From this perspective, we can indeed use the trends in U.S. stocks to gauge more about Bitcoin's future trends.
Original link
