Original | Odaily Planet Daily
Author | jk
For a long time, Bitcoin's price fluctuations have shown two distinctly different trends compared to traditional financial markets, underpinned by two completely different narratives: as a risk asset, when market sentiment is high and risk appetite increases, Bitcoin's performance often aligns with U.S. stocks, exhibiting a high positive correlation. This is mainly due to increased participation from institutional investors, making its capital flow patterns similar to those of other high-risk assets. However, during market panic or the outbreak of risk events, Bitcoin is viewed as a safe-haven asset, decoupling from U.S. stock trends and even exhibiting negative correlation, particularly when investors lose faith in the traditional financial system.
These two narratives complicate Bitcoin's role, making it both a part of risk assets and potentially a safe-haven asset. Which one 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 TradingView statistics, 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 the correlation between Bitcoin and the stock market has traditionally been low, this correlation has increased 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 exhibited a negative correlation of -0.76 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 performs 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 Bitcoin's, it excels in stability and lower volatility.
Logarithmic comparison of Bitcoin and the Nasdaq index. Source: FRED
It can be observed that during macro hot events, the two usually exhibit strong correlation: for example, during the market recovery after the COVID-19 pandemic in 2020, both exhibited significant upward trends. This may reflect an increased demand for risk assets among investors in the context of loose monetary policy.
However, during other periods (such as in 2022), Bitcoin and Nasdaq exhibited significant divergence, showing reduced correlation, especially during periods of black swan events that only affected the crypto market, where Bitcoin could experience unilateral crashes.
Of course, in terms of periodic returns, Bitcoin can easily outperform the Nasdaq by a significant margin. However, purely from the data on price correlation, the correlation between the two is indeed strengthening.
A report published 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 is currently lower than the correlation 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 worldwide. If an asset could be found that has a stable correlation of -1.0 (completely inverse) with the S&P 500 index, it would be highly sought after. This characteristic means that when the S&P 500 performs negatively, this asset could potentially provide positive returns, demonstrating hedging characteristics.
Although stocks are generally seen as risk assets, U.S. Treasuries 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. Treasuries, especially long-term ones, may still fluctuate. An important discussion point in 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 classes may rise or fall simultaneously during the same period.
Assets rising or falling simultaneously contradict the original intention of hedging. This phenomenon is reminiscent of 2022 when both stocks and bonds recorded negative returns, defying many investors' expectations of risk diversification.
Currently, Bitcoin does not exhibit strong hedging capabilities against the returns of the S&P 500 index. According to 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 the return correlation between the S&P 500 index and U.S. Treasuries. If this trend continues, Bitcoin will attract more attention from asset allocators and investors, gradually becoming a more attractive investment tool over time.
From this perspective, compared to the risk-free U.S. Treasuries, Bitcoin only needs to be the 'safe-haven asset that runs faster than U.S. Treasuries,' and investors will naturally choose Bitcoin as part of their portfolios.
The chart shows the 50-day rolling correlation between Bitcoin prices and the S&P 500 index in 2022. On average, the correlation is approximately 0.1, peaking above 0.4 and dipping below -0.1. Source: WisdomTree
Institutional holdings: ETF share is increasing
The role of institutional investors in the Bitcoin market is becoming increasingly important. Currently, 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. The following is a detailed analysis:
According to data, a total of 19.9 million Bitcoins have been mined out of a total of 21 million, leaving 1.1 million still unmined.
Among the mined Bitcoins, the holdings of the top 1000 dormant addresses over 5 years account for 9.15%, equivalent to approximately 1.82 million coins. 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 top 20 publicly listed companies, including Microstrategy, hold 2.63%, approximately 520,000 coins, among which Microstrategy alone holds 2.12% of the total Bitcoin amount (about 440,000 coins).
On the other hand, according to data from The Block, as of the time of writing this article, the institutional holdings of all ETFs have reached 1.17 million coins.
If we assume that the Bitcoin in dormant addresses, the unmined quantity, and the holdings of publicly traded companies remain unchanged, then the theoretical circulating supply in the market = 19.9 million - 1.82 million - 520,000 = 17.56 million coins.
Institutional holding ratio: 6.67%
Thus, ETFs currently control 6.67% of Bitcoin's circulating supply, a ratio that may further increase as more institutions get involved. From the same period last year to this year, we can see that the share from exchanges has been significantly compressed, while the share from ETFs has further increased.
Bitcoin holding ratio. Source: CryptoQuant
Similar to U.S. stocks, when institutional investors gradually increase their holding ratios in the market, investment decision behaviors (such as increasing or decreasing holdings) play a more critical role in price fluctuations. This market centralization phenomenon easily leads to Bitcoin's price movements being significantly influenced by U.S. stock market sentiments, especially in the flow of investment funds driven by macroeconomic events.
Americanization Process
The impact of U.S. policy on the Bitcoin market is becoming increasingly significant. This topic remains largely uncertain: based on Trump's current style of operation, if crypto-friendly individuals occupy key decision-making positions at critical policy junctures in the future, such as promoting a more lenient regulatory environment or approving more Bitcoin-related financial products, Bitcoin adoption rates are bound to rise further. This deepening of adoption will not only solidify Bitcoin's status as a mainstream asset but may also further tighten 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 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 U.S. stock movements to gauge more trends regarding Bitcoin in the future.
