Stop it! The data tells us that Bitcoin is not related to U.S. stocks and gold

Written in front: Over the years, the narrative about Bitcoin has undergone multiple versions of development, and of all the competing narratives, two narratives are considered to be the most controversial in the current environment, they are "Non-relevant financial assets" and "safe-haven assets", but these claims are lack of data support, and the coinmetrics research team in this week's data report on the intra-day correlation and closing correlation between Bitcoin and US stocks and gold Sex was analyzed to test these popular claims.

Research methodology

In order to calculate the correlation of these investment targets, we first obtain the natural logarithmic return of each asset, and then calculate the rolling Pearson correlation within a specified time period. In the 250-day rolling time window, we analyzed the closing correlation using New York's closing price (4:00 pm EST). We also studied intra-day correlation by observing the 5-minute return within a 60-hour rolling time window.

Since the cryptocurrency market is never closed, and the stock market is closed at night and weekends, we eliminated the bitcoin results when the stock market closed and stitched the results together. This helps to eliminate some noise, but it also has side effects, which sometimes produce an exaggerated correlation around the opening / closing of each trading day.

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The data sources involved in the study included Coin Metrics, Finnhub and FRED.

Unrelated financial assets

When analyzing Bitcoin as an investment option, the relevance of Bitcoin to other financial assets is an important consideration. If Bitcoin has a low correlation with traditional financial assets such as stocks, then it can be effectively used as a portfolio diversification tool .

Because the stock market is large and complex, it is difficult to analyze the true correlation between Bitcoin and the entire stock market. A relatively simple method is to look at the correlation between Bitcoin and the S & P 500 index, which can be used as a representative indicator of the entire US stock market.

Historically, the correlation between Bitcoin and the S & P 500 index has been relatively small. Since 2012, the correlation between Bitcoin and the S & P 500 index has generally remained between -0.15 and 0.15, indicating that there is little correlation between the two .

But in the past month, the correlation between Bitcoin and the S & P 500 index has suddenly risen to a record high . The figure below shows the close correlation calculated by the 250-day rolling time window.

At a more detailed level, intraday data shows that the correlation peaked on Black Thursday (March 12), when both the cryptocurrency market and the stock market experienced historic lightning plunges. By the end of March, the correlation between the two had fallen to relatively normal levels, but since then it has started to climb again .

Does this mean that Bitcoin and the S & P 500 index are now suddenly connected again?

maybe not. Although the correlation between the two has increased in the short term, this happened in a very unique market environment. On March 12, as the news about the spread of the COVID-19 virus became more and more terrible, investors around the world suddenly began to cash out and sell assets. As a result, the correlation between most of the world ’s assets surged that day.

For example, the correlation between SPY and GLD suddenly spiked to its highest level since 2013. This may be due to the overall sell-off triggered by the liquidity crunch caused by the new crown pandemic.

Last year, the correlation between Bitcoin and the S & P 500 index was close to zero. The following table shows the distribution of intra-day correlations over the past 365 days (5-minute return, 60-hour rolling correlation). The correlation distribution is concentrated around 0, with an average value of -0.0075. This shows that under normal market conditions, Bitcoin has no significant correlation with the S & P 500 index .

The fundamentals of Bitcoin have not changed in the last month. However, major changes have taken place in the external world. In the long run, the correlation between Bitcoin and the S & P 500 index may return to the mean and return to a level close to zero (unless the fundamentals of the two have fundamentally changed). But in the short term, or at least during the time period when the liquidity crisis continues, there may continue to be a high correlation between the two, because the global situation seems to be affecting these two markets .

Hedging asset narrative

Another popular narrative about Bitcoin is safe-haven assets. Generally speaking, safe-haven assets are investment products that are expected to preserve or increase in value during the market turmoil. Gold has traditionally been regarded as a major example of safe-haven assets. In uncertain times, the price of gold tends to rise relative to other asset classes.

Historically, the correlation between Bitcoin and gold is not strong . However, the correlation between Bitcoin and gold suddenly increased in March, similar to the situation of Bitcoin and the S & P 500 index.

Although under normal market conditions, gold is usually regarded as a safe-haven asset, it, like most other asset classes, due to liquidity crisis, gold also experienced a relatively large sell-off on March 12. As bitcoin and gold prices both fell on March 12, the correlation between bitcoin and gold increased (although the prices of both fell, but because both assets moved in the same direction, the correlation increased ). Interestingly, since then, gold and Bitcoin have maintained a high correlation .

Although bitcoin and gold may not be safe havens during the global liquidity crisis , they may serve as safe-haven assets during periods of intensified monetary inflation and quantitative easing policies . Given the Fed ’s recent release of more than $ 2 trillion and the unprecedented uncertainty in global health and economic conditions, Bitcoin may become a safe haven for certain events, and may even change daily. However, given the huge confounding factors of the global new crown pandemic, it is still difficult for us to draw strong conclusions.

The correlation between Bitcoin and gold showed similar signs of growth in early 2020. In January, due to tensions between the United States and Iran, the prices of Bitcoin and gold both rose, and the correlation between the two increased in the short term.

These are small pieces of evidence that the relationship between Bitcoin and gold may be growing. Nevertheless, the overall correlation between Bitcoin and gold is still relatively weak .

The graph below shows the distribution of the intra-day correlation between Bitcoin and gold last year (5-minute return, 60-hour rolling correlation). The correlation distribution is relatively concentrated around 0, but the average value is 0.1194, which is slightly higher than the average of the correlation distribution of Bitcoin and the S & P 500 index .

in conclusion

Historically, the correlation between Bitcoin and US stocks or gold has not been high. Although the correlation between Bitcoin and the latter two has reached the highest level in history in the recent past, if the fundamentals of these markets have not changed significantly , The correlation between them is unlikely to remain high for a long time. But there is some evidence that the correlation between Bitcoin and gold may begin to increase, at least slightly .

Although the short-term prospects of Bitcoin are still uncertain in the global new crown pandemic, if central banks around the world continue to inject funds into the global economy at a historical rate, this may be a long-term turning point for Bitcoin. The following table shows the correlation between Bitcoin and the St. Louis Fed 5-year inflation expectation rate (T5YIFR). Theoretically, if bitcoin is used as a safe haven during periods of currency inflation, the price of bitcoin should rise as expected inflation increases (and vice versa). Interestingly, as the Fed took action in response to the global new crown pandemic, the correlation between Bitcoin and T5YIFR also surged on March 12.

We will continue to follow developments in the situation and provide analysis around Bitcoin's changing narrative.

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