Bitcoin's price fluctuations have long shown two completely different trends compared to traditional financial markets, stemming from two entirely different narratives: as a risk asset, Bitcoin's performance often aligns with U.S. stocks during times of heightened market sentiment and increased risk appetite, exhibiting a high positive correlation. This is mainly due to the increased participation of institutional investors, making its capital flow patterns similar to other high-risk assets. However, during times of market panic or risk events, Bitcoin is viewed as a safe-haven asset, decoupling from the trends of U.S. stocks, 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 a risk asset and may also play the role of a safe-haven asset. Which will it be? Especially at this time when Trump is about to take office?
Price Correlation: More 'Hedging' than U.S. Government Bonds
According to TradingView statistics, in 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, this correlation has increased in recent years. In the past five years, it has risen to 0.41.
However, Bitcoin's strong volatility makes this 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 event), but reached a positive correlation of 0.57 by January 2024.
In contrast, the S&P 500 has performed relatively steadily, with an average annual return 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 is favored for its stability and low volatility.
Source: FRED logarithmic comparison of Bitcoin and Nasdaq indices
It can be seen that during major macroeconomic hotspot events, the two often exhibit strong correlation: for example, during the market recovery period after the COVID-19 pandemic in 2020, both showed significant upward trends. This may reflect an increased demand from investors for risk assets against the backdrop of loose monetary policy.
However, during other time periods (such as in 2022), the trends of Bitcoin and Nasdaq differed significantly, showing weakened correlation, especially during the time of black swan events occurring exclusively in the crypto market, where Bitcoin experienced unilateral crashes.
Of course, in terms of periodic returns, Bitcoin can completely outperform the Nasdaq by a large margin. However, purely from the data on price correlation, the correlation between the two is indeed continually 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 correlation has recently been lower than the correlation between the S&P 500 index and U.S. government bonds' 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 in the world. If a type of asset can be found that has a return correlation of -1.0 (perfectly 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 could potentially provide positive returns, demonstrating hedging characteristics.
Although stocks are generally considered risk assets, U.S. government bonds are regarded 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. government bonds, especially long-term bonds, may still fluctuate. An important discussion point for 2024 is that the correlation coefficient between the S&P 500 index and U.S. government 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 simultaneously is the exact opposite of the purpose of hedging. This phenomenon is similar to 2022, when both stocks and bonds recorded negative returns, contradicting many investors' expectations for risk diversification.
Currently, Bitcoin has not shown 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, recently, the correlation between Bitcoin and the S&P 500 index's returns has been lower than that between the S&P 500 index and U.S. government bonds' returns. 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 risk-free assets like U.S. government bonds, Bitcoin only needs to be the 'hedging asset that runs faster than U.S. government bonds' to be sufficient, and investors will naturally choose Bitcoin as part of their investment portfolios.
Source: WisdomTree chart showing 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.
Institutional Holdings: The ETF share 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 impact of institutions on the market, and this trend of centralization may further drive the correlation between Bitcoin and U.S. stocks. Here is a detailed analysis:
According to data, 19.9 million Bitcoins have been mined so far, with a total supply of 21 million, so there are 1.1 million remaining to be mined.
Among mined Bitcoins, the share of the top 1,000 dormant addresses for over 5 years is 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.
Moreover, according to Coingecko data, the top 20 listed companies, including Microstrategy, hold 2.63% of Bitcoin, approximately 520,000 coins, of which Microstrategy alone holds 2.12% of the total Bitcoin supply (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 currently reach 1.17 million coins.
If we assume that the Bitcoins in dormant addresses, the unmined quantity, and the holdings of listed companies remain unchanged, then the theoretical circulation in the market = 19.9 - 1.82 - 0.52 = 17.56 million coins.
Institutional Holdings Ratio: 6.67%
Thus, it can be seen that ETF institutions currently control 6.67% of the Bitcoin circulation, and this ratio may further increase in the future as more institutions get involved. From the same period last year to this year, we can observe that the market share from exchanges has been significantly compressed, while the market share from ETFs has grown further.
Source: CryptoQuant Bitcoin Holdings Ratio
Similar to U.S. stocks, when institutional investors gradually increase their holdings in the market, investment decision-making behavior (such as buying or selling) plays a more critical role in price fluctuations. This phenomenon of market centralization can easily lead to Bitcoin's price trends being significantly influenced by U.S. stock market sentiment, especially in the flow of investment funds driven by macroeconomic events.
The Process of 'Americanization'
The impact of U.S. policies on the Bitcoin market is increasingly significant. Currently, this issue is more of an unknown: According to Trump's current style of acting, if crypto-friendly individuals occupy important decision-making positions at key policy points in the future, such as promoting a more lenient regulatory environment or approving more financial products related to Bitcoin, the adoption rate of Bitcoin is bound to increase further. This deepening adoption will not only solidify Bitcoin's position as a mainstream asset but may also further narrow the correlation between Bitcoin and U.S. stocks, which both 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 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 of U.S. stocks to gauge more trends regarding 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 kind of U.S. stock?' This article was first published in 'Crypto City.'
