Bitcoin correlation with S&P 500 dipping but remains high

on Aug 10, 2023
  • Bitcoin’s recent dipping correlation with risk assets has put some in the industry on notice
  • Many narratives can be constructed around this, however, and different analyses convey different conclusions
  • Ultimately, while Bitcoin may decouple in future, it still trades like a risk asset

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There has been some coverage within the crypto space recently focused on the always-intriguing relationship between Bitcoin and the stock market. 

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Namely, that the correlation between the duo is dipping rapidly, dipping firmly into negative territory in recent weeks. This draws eyeballs because, for many, the potential of Bitcoin will only be realised when it finally decouples from risk assets. However, to draw conclusions from the recent price action that this is decoupling is now occurring would be misleading. 

Before getting into why, let’s first assess the correlation on a 30-Day rolling basis, showing the dip in the past few weeks:

Zooming out to incorporate a time horizon of the last eighteen months, which roughly coincides with the transition of the economy into a tight monetary environment – and thereby a pullback in risk assets – we see that the correlation was only lower than the current level twice. 

The first time we such a breakdown in the relationship was the collapse of FTX, which sent the crypto markets tumbling at the same time that the stock market jumped off the back of inflation readings that landed below expectations, sparking a recalibration regarding the market’s views on how high interest rates would rise. 

The second time was mid-June when we had a series of crypto-specific events land in quick succession: the SEC suing Binance, then Coinbase, then a slew of spot ETF applications. 

Why charts can be misleading

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So, this all looks positive, right? Well, sometimes charts can be misleading. The first thing to point out is that the above correlation coefficients are calculated on a rolling 30-day window. If we widen this to 90-days, the picture changes. Obviously, with a greater sample, the volatility of the metric dies down, but it also gives more of a perspective than the 30-day. Take a look at what it conveys:

The dampening down is far more demure. Having said that, it does still show that overall, the trend has headed downward since around last October (again, if we overlook the FTX black swan here). Incidentally, this was around the same time that markets bottomed out across the board, with sentiment at an all-time low. Since then, inflation has eased off and the chances of a very testing recession have decreased (although the fight is not yet over). 

But while some loosening in the lockstep relationship between Bitcoin and the stock market has been seen, it is important to outline that it is still extremely high. Additionally, the correlation coefficients calculated and discussed throughout this piece all compare Bitcoin to the S&P 500. When plotting its relationship with the more tech-heavy Nasdaq, the correlation is even higher again. 

And to firmly hammer home how different angles on the same statistic can be leveraged to construct narratives, let us look at one more chart. Instead of presenting the 30-day or the 90-day, this time we look at a rolling 60-day window:

This shows the opposite – that correlation is rising. As if it was still in doubt, it firmly tells us how prudent we need to be when assessing the movements here. When searching across the Internet and digging through research newsletters and analysts’ work, the spread of sample windows chosen between 30-day, 60-day and 90-day is wide, and oftentimes the varying conclusions that each presents are not mentioned. 

One neat analogy for how important the window can be is when looking at inflation. We have seen inflation cascade down to 3% as of last month’s reading, However, this is on a year-over-year basis, and constitutes 3% growth on top of the growth last year. With a twelve-month window, we are seeing some hot readings from last year drop out, which is boosting the rate of decrease in the headline number. 

Undoubtedly, inflation is coming down quickly, but the effect is being exacerbated by the peak readings which landed this time last year falling out at the back end. This is similar to what happens when we cut off our correlation window at 30-days or 60-days, if there were periods of particularly strong readings one way or another at the edge of those samples. 

A lesson to be had 

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Within an industry as polarising as cryptocurrency can be, the issue of framing and other biases is an important lesson. This is just one example, but often charts and viewpoints are shared based on data which has, whether consciously or not, been manipulated to confirm peoples’ pre-conceived positions. 

Take a look at this tweet from well-known crypto bull Pomp who admonishes the S&P 500 for only generating a return of under 1000% in the last 30 years. The problem? Dividends are excluded from the S&P 500, ultimately rendering the comparison useless, especially over a time horizon as long as three decades (for reference, with dividends included, the return in this period is 1700%).  

A common online position is that a love of Bitcoin means one also needs to look down upon any other assets or refuse to even have a discussion about the perceived shortcomings or drawbacks of Bitcoin is a strange one.

Usually, these biases are not malicious. Information spreads rapidly in this digital age, and with an industry as nascent and enigmatic as crypto still is, everybody is trying to figure it out as we go along.

But to get back to the point at hand, correlation, maybe the easiest of all is to just plot the return of Bitcoin against the return of the stock market since the start of this cycle (if we can roughly declare the start of 2022 as this high-inflation new paradigm). What does the below chart tell you?

Certainly, the relationship is tight. And no doubt, in the last month, we seem to be getting some divergence – although Bitcoin has underperformed comparatively. That could be regulatory-driven concern or a whole host of other factors. 

The bottom line is this: the question of if, or when, Bitcoin will decouple from risk assets is one of the biggest and most pivotal governing not only Bitcoin itself, but the entire space. Debate around this will continue to swirl and remains one of the most fascinating aspects of the industry to analyse.

However, in looking at today’s price movement, while some loosening may have occured as the market moves to anticipate a potential ceasing of the relentless interest rate hikes of the last eighteen months, Bitcoin is currently very correlated with the stock market and risk assets. At least for today, that much holds true. 


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