Written by: jk, Odaily Planet Daily
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 complicate Bitcoin's role, making it part of risk assets while also potentially serving as a safe-haven asset. Which one will it be? Especially at this point 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. In 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 displayed 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 has performed relatively stable, 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 Bitcoin's, 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, both usually exhibit strong correlations: for example, during the market recovery period following the COVID-19 pandemic in 2020, both showed significant upward trends. This may reflect an increased demand for risk assets among investors under a backdrop of loose monetary policy.
However, during other periods (such as 2022), there was a significant divergence in the movements of Bitcoin and Nasdaq, showing a weakening correlation, especially during periods when black swan events affecting only the crypto market led to a one-sided crash in Bitcoin.
Of course, in terms of periodic return rates, Bitcoin can completely outperform the Nasdaq by a wide margin. 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 a similar viewpoint, stating that although the correlation between Bitcoin and U.S. stocks is not high in absolute terms, this recent correlation is lower than the return correlation between the S&P 500 index and U.S. Treasuries.
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 followed indices worldwide. If an asset can be found that has a return correlation of -1.0 (completely inverse) with the S&P 500 index and is relatively stable, 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 risk assets, U.S. Treasuries are viewed by many as closer to a 'risk-free' asset. 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 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 that the two asset classes may rise or fall simultaneously over the same time period.
Assets rising or falling simultaneously is exactly the opposite of the intention to hedge. This phenomenon is similar to 2022, when both stocks and bonds recorded negative returns, contradicting many investors' expectations of diversifying risk.
Currently, Bitcoin has not shown a strong hedging ability against the return rate 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 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 appealing investment tool over time.
From this perspective, compared to the risk-free asset of U.S. Treasuries, Bitcoin only needs to be the 'safe-haven asset that runs faster than U.S. Treasuries.' Investors will 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, with peaks exceeding 0.4 and lows below -0.1. Source: WisdomTree
Institutional holdings: ETF share is increasingly large
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 influence, and this trend of concentration may further drive the correlation between Bitcoin and U.S. stock movements. Here is a specific analysis:
According to data, Bitcoin has currently mined 19.9 million coins out of a total supply of 21 million, leaving 1.1 million coins yet to be mined.
Among the mined Bitcoins, the share of the 1,000 dormant addresses held for over 5 years accounts 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.
Furthermore, according to Coingecko data, the top 20 listed companies, including Microstrategy, hold 2.63% of Bitcoin, 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, all institutional holdings of ETFs currently amount to 1.17 million coins.
Assuming 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 coins
Institutional holding percentage: 6.67%
It can be seen that 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 last year to this year, we have noticed a significant compression of shares from exchanges, while shares from ETFs have further increased.
Bitcoin holding percentage. Source: CryptoQuant
Similar to U.S. stocks, when the share of institutional investors in the market gradually increases, investment decision-making behavior (such as increasing or decreasing holdings) plays a more critical role in price fluctuations. This market concentration phenomenon can significantly impact Bitcoin's price movements, especially in the flow of investment funds 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, more remains unknown: based on Trump's current style of governance, if pro-crypto individuals occupy important decision-making positions during key policy junctures in the future, such as promoting a more lenient regulatory environment or approving more Bitcoin-related financial products, Bitcoin's adoption rate is bound to increase further. 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, both of which reflect the direction of the U.S. economy.
In summary, the correlation with U.S. stocks is gradually strengthening, 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 trends of U.S. stocks to judge more about Bitcoin's future trends.
