Bitcoin's price fluctuations have long shown two distinctly different trends compared to traditional financial markets, driven by two completely different narratives: as a risky asset, during heightened market sentiment and increased risk appetite, Bitcoin's performance often aligns with U.S. stocks, exhibiting a high positive correlation. This is primarily due to increased participation from institutional investors, making its capital flow patterns similar to other high-risk assets. However, during market panic or risk events, Bitcoin is viewed as a safe-haven asset, decoupling from U.S. stock trends, and sometimes exhibiting negative correlation, especially when investors lose confidence in the traditional financial system.
These two narratives make Bitcoin's role more complex, becoming part of a risky asset while potentially also playing the role of a safe-haven asset. Which one will it be? Especially at this point in time with Trump about to take office?
Price Correlation: More 'Hedging' than U.S. Treasury Bonds
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 that of other alternative assets. For instance, the correlation between the S&P Goldman Sachs Commodity Index and the S&P 500 during the same period was 0.42. Although the historical correlation between Bitcoin and the stock market has been low, this correlation has been increasing in recent years. Over the past five years, it has risen to 0.41.
However, Bitcoin's strong volatility makes the 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 time of the FTX event), but reached a positive correlation of 0.57 by January 2024.
In contrast, the S&P 500 has shown relatively stable performance, with an average annual 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 has the advantage of stability and lower volatility.
Source: FRED Comparison of Bitcoin and Nasdaq Index Logarithmically
It can be seen that during significant macroeconomic events, the two usually exhibit strong correlation: for example, during the market recovery period following the COVID-19 pandemic in 2020, both showed significant upward trends. This may reflect an increase in investor demand for risky assets against the backdrop of loose monetary policy.
However, during other periods (such as in 2022), Bitcoin and Nasdaq exhibited significantly different trends, indicating a weakening correlation, especially during periods marked by black swan events occurring specifically in the crypto market, when Bitcoin experienced unilateral crashes.
Of course, in terms of periodic returns, Bitcoin can certainly outperform the Nasdaq by a wide margin. However, purely from the price correlation data, the correlation between the two is indeed strengthening.
A report released by WisdomTree also mentioned a similar viewpoint, stating that despite the low absolute correlation between Bitcoin and U.S. stocks, this correlation is currently lower than the return correlation between the S&P 500 index and U.S. Treasury bonds.
Trillions of dollars in assets globally use the S&P 500 index as a benchmark or attempt to track its performance, making it one of the most closely watched indices worldwide. If an asset can be found that has a return correlation of -1.0 (completely inverse) and is relatively stable with the S&P 500 index, then this asset 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 hedging properties.
Although stocks are generally considered risky assets, U.S. Treasury bonds are viewed by many as closer to 'risk-free' assets. The U.S. government can print money to fulfill its debt obligations, although the market value of U.S. Treasury bonds, especially long-term bonds, may still fluctuate. An important discussion point in 2024 is that the correlation coefficient between the S&P 500 index and U.S. Treasury bonds is approaching 1.0 (positive correlation 1.0). This means that the two asset classes may rise or fall simultaneously during the same time period.
Assets rising or falling together is the exact opposite of the intention of hedging. This phenomenon is similar to 2022, when both stocks and bonds recorded negative returns, contrary to many investors' expectations of risk diversification.
Bitcoin currently does not exhibit strong hedging capabilities 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, the recent return correlation 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 attention from asset allocators and investors and gradually become a more attractive investment tool over time.
From this perspective, compared to the risk-free asset of U.S. Treasury bonds, Bitcoin only needs to be the 'faster runner than U.S. Treasury bonds' as a hedging asset for investors to naturally choose it as part of their investment portfolio.
Source: WisdomTree The chart shows the 50-day rolling correlation between Bitcoin prices and the S&P 500 index in 2022. On average, the correlation is around 0.1, with peaks exceeding 0.4 and lows below -0.1.
Institutional Holdings: The share 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 the market influence of institutions, and this trend of centralization may further drive the correlation between Bitcoin and U.S. stock trends. Here is a specific analysis:
According to data, 19.9 million Bitcoins have been mined so far, out of a total of 21 million, so there are 1.1 million remaining to be mined.
Among the mined Bitcoins, the holdings of the top 1,000 dormant addresses for over 5 years account for 9.15%, equivalent to about 1.82 million BTC. This portion of Bitcoin typically does not enter the circulating market, effectively reducing the active supply available in the market.
Additionally, according to Coingecko data, the top 20 listed companies, including Microstrategy, hold a share of 2.63%, approximately 520,000 BTC, of which Microstrategy alone holds 2.12% of the total Bitcoin supply (about 440,000 BTC).
On the other hand, according to data from The Block, as of the time of writing, the institutional holdings of all ETFs currently amount to 1.17 million BTC.
Assuming that the Bitcoin in dormant addresses, the unmined quantity, and the holdings of listed companies remain unchanged, the theoretical circulating supply in the market = 1990 - 182 - 52 = 17.56 million BTC.
Institutional Holdings Share: 6.67%
As can be seen, ETF institutions currently control 6.67% of the circulating supply of Bitcoin, a ratio that 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 market share from exchanges, while the market share from ETFs has further grown.
Source: CryptoQuant Bitcoin Holding Share
Similar to U.S. stocks, when institutional investors gradually increase their holdings in the market, investment decision-making behaviors (such as increasing or decreasing positions) play a more critical role amidst price fluctuations. This phenomenon of market centralization can easily lead to Bitcoin's price trend being significantly influenced by the sentiment of the U.S. stock market, especially during investment fund flows driven by macroeconomic events.
The Process of 'Americanization'
The impact of U.S. policy on the Bitcoin market is becoming increasingly significant. Regarding this issue, many uncertainties remain: according to Trump's current style of operation, if crypto-friendly individuals occupy important decision-making positions at key policy junctures in the future, such as pushing for a more lenient regulatory environment or approving more Bitcoin-related financial products, the adoption rate of Bitcoin will inevitably further increase. This deepening of adoption will not only consolidate Bitcoin's status as a mainstream asset but may also further bridge the correlation between Bitcoin and U.S. stocks, which both reflect the trends of the U.S. economy.
In summary, the correlation with U.S. stocks is gradually strengthening, primarily due to the joint reaction of prices to macroeconomic 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 in U.S. stocks to gauge more trends related to Bitcoin in the future.
This article is reprinted with permission from: (Deep Tide TechFlow)
Original author: jk, Odaily Planet Daily
'Is Bitcoin meaningless? BTC being assimilated by the U.S.: Will it ultimately become another type of U.S. stock?' This article was originally published in 'Crypto City.'
