Author: jk, Odaily Planet Daily
Bitcoin's price volatility has long shown two completely different trends compared to traditional financial markets, driven by two entirely different narratives: as a risk asset, Bitcoin tends to correlate positively with U.S. stocks during periods of high market sentiment and increased risk appetite. This is primarily due to increased participation from institutional investors, making its fund flow patterns similar to 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 may even exhibit negative correlation, especially when investors lose confidence in the traditional financial system.
These two narratives complicate Bitcoin's role, making it part of risk assets while potentially also serving as 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. Treasuries.
According to TradingView statistics, the correlation between Bitcoin and the S&P 500 index over the past decade is 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 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 on November 11, 2023 (around the FTX incident) showed a negative correlation of -0.76, but by January 2024, it reached a positive correlation of 0.57.
In contrast, the S&P 500 has shown relatively stable performance, 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 low volatility.
Logarithmic comparison of Bitcoin and the Nasdaq index. Source: FRED.
It can be seen that during macro hot events, the two usually exhibit strong correlation; for instance, during the market recovery period 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 2022), Bitcoin and the Nasdaq showed a significant divergence, indicating a weakening of correlation, particularly during black swan events occurring solely within the crypto market when Bitcoin may experience a unilateral plunge.
Of course, in terms of periodic returns, Bitcoin can easily outperform the Nasdaq. However, purely from the perspective of price correlation data, the correlation between the two is indeed continuously strengthening.
A report released by WisdomTree also mentioned similar views, stating that although the correlation between Bitcoin and U.S. stocks is not high in absolute terms, this recent correlation is lower than that between the S&P 500 index and U.S. Treasury returns.
Globally, tens of trillions of dollars in assets benchmark against or attempt to track the performance of the S&P 500 index, making it one of the most closely watched indices worldwide. If an asset can be found that has a correlation of -1.0 (completely inverse) and is relatively stable with the S&P 500 index, that asset will be highly sought after. This characteristic means that when the S&P 500 index performs negatively, such an asset may provide positive returns, demonstrating hedging characteristics.
Although stocks are generally considered risk assets, U.S. Treasuries are seen by many as closer to 'risk-free' assets. The U.S. government can fulfill its debt obligations by printing money, although the market value of U.S. Treasuries, especially long-term bonds, may still fluctuate. A significant 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 the two asset classes may rise or fall simultaneously within the same time frame.
The simultaneous rise or fall of assets is precisely the opposite of the intention of hedging. This phenomenon is similar to 2022 when both stocks and bonds recorded negative returns, contradicting many investors' expectations of risk diversification.
Bitcoin currently does not show a strong hedging ability against the returns of the S&P 500 index. 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 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 risk-free assets like U.S. Treasuries, Bitcoin only needs to be the 'safer asset that runs faster than U.S. Treasuries,' and investors will naturally choose Bitcoin as part of their portfolio.
The chart illustrates the 50-day rolling correlation between Bitcoin prices and the S&P 500 index in 2022. On average, the correlation is approximately 0.1, with peaks exceeding 0.4 and troughs 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, the distribution of Bitcoin holdings shows a significant increase in institutional market impact, and this trend of centralization may further drive the correlation between Bitcoin and U.S. stock movements. Here is a detailed analysis:
According to data, Bitcoin has currently mined 19.90 million coins, with a total supply of 21 million coins, hence 1.10 million coins remain unmined.
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 coins. 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 2.63%, approximately 520,000 coins, with Microstrategy alone holding 2.12% of the total Bitcoin supply (about 440,000 coins).
On the other hand, according to The Block data, as of the time of this writing, institutional holdings in all ETFs have reached 1.17 million coins.
Assuming the number of Bitcoins 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.
Proportion of institutional holdings: 6.67%
It can be seen that institutional ETFs currently control 6.67% of Bitcoin's circulating supply, a proportion that 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 exchange shares, while shares from ETFs have further grown.
Bitcoin holding proportion. Source: CryptoQuant
Similar to U.S. stocks, when institutional investors gradually increase their holdings in the market, investment decision-making behavior (such as increasing or decreasing holdings) plays a more critical role in price fluctuations. This phenomenon of market centralization can significantly influence Bitcoin's price movements based on the sentiment of the U.S. stock market, especially during investment fund flows driven by macroeconomic events.
The 'Americanization' process.
U.S. policy's impact on the Bitcoin market is becoming increasingly significant. Regarding this issue, there are still many unknowns: based on Trump's current style, if crypto-friendly individuals occupy important decision-making positions during future key policy nodes—such as promoting a more relaxed regulatory environment or approving more financial products related to Bitcoin—the adoption rate of Bitcoin will inevitably increase. This deepening of adoption will not only solidify Bitcoin's status as a mainstream asset but may also further bridge the correlation between Bitcoin and U.S. stocks, 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 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 movements of U.S. stocks to gauge more trends regarding Bitcoin in the future.
