Kraken’s head of intelligence, Thomas Perfumo, and XBTO Group’s head of trading, Paul Eisma, weigh … [+]
Bitcoin (BTC) crashed in price largely alongside the stock market back in March 2020 around Covid-19 pandemic concerns and prevention measures. If stocks crash again, will bitcoin follow? The answer is part of a mixed bag, according to Thomas Perfumo, head of intelligence for crypto exchange Kraken, and Paul Eisma, head of trading at XBTO Group.
“We’ve observed a high positive correlation between S&P 500 and bitcoin this year,” Perfumo told me via email correspondence on August 24, pointing toward bitcoin’s price action traveling in step with a popular mainstream financial market barometer. “Longer-term, I don’t see a stock market crash impairing the value of bitcoin, much like companies aren’t strictly impaired because their stock price goes down.”
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
In March, the U.S. braced for the impact of the Covid-19 pandemic, putting restrictive measures in place in an attempt to slow the viral spread. In turn, the U.S. stock market suffered its harshest fall in more than 20 years. Between March 4 and 23, the S&P 500 fell approximately 30%—a drastic decline for mainstream financial markets, based on TradingView.com data.
Bitcoin also spiraled downward in similar fashion, dropping around 58% between March 7 and 13. Although BTC often sees price moves much larger than mainstream markets, accounting for the asset dropping nearly twice as much as the S&P 500 at their bottoms, the two clearly fell in price around the same time period.
Bitcoin posted a fast recovery, however, bouncing approximately 162% in the 55 days following its crash, while the S&P 500 only bounced about 47% in 77 days.
Compared To Other Markets
“What we’ve seen since March is outperformance in several ‘safe haven,’ assets like gold, bitcoin, and even bonds, where equities haven’t matched,” Perfumo explained. “In equities markets specifically, the largest companies like AAPL, AMZN, GOOG, etc. are key contributors to the overall market performance,” he said, referencing the stock ticker symbols for Apple
“In fact, I think if you removed the performance attributable to the top ten constituents in many large indices, you may actually see more pain than the headline suggests,” he added, referencing struggles faced by many smaller companies.
The crypto industry largely views bitcoin as a store of value asset, often compared to gold. As Perfumo noted, people view such assets as a hedge to stocks, cash, etc. Bitcoin’s place as a hedge independent from mainstream markets, however, still holds as a debatable concept, as seen in its correlation to other markets at times.
Correlation Metrics
Over at crypto finance company XBTO, Eisma has noticed mainstream market prices traveling in line with bitcoin. “The recent correlation of equities and bitcoin is alarming,” Eisma told me in an August 25 email. “Correlations are stochastic, extremely challenging to model and even more difficult to trade.”
Eisma pointed toward a measurement from data company Coin Metrics for tracking bitcoin’s price correlation with the S&P 500, while using the Pearson setting, which essentially reveals how similarly two things act. Looking over 2019, applying the 90-day setting, Eisma cited mixed results, seeing positive correlation between BTC and the S&P 500 for the first several months of the year, followed by negative correlation.
“Correlations in 2020 were insignificant at around +1%, until the violent Black Thursday/Friday the 13th selloff in March, when BTC sold off along with equites, driving correlations to approximately +50%,” he said referencing bitcoin’s dramatic fall amid Covid-19 fears.
As explained simply in an April 2020 article from blockchain industry media and data site LongHash: “A coefficient of 1 indicates perfect correlation, a coefficient of 0 means there is effectively no correlation, and a coefficient of -1 points to a perfectly inverse correlation.”
“The subsequent rally in risk and similar uptrend in BTC has stabilized correlations in the +35% to +45% range,” Eisma said pointing out continued similar price action between the two assets. “If the current rally in BTC occurred with flat to downwards equity/risk markets, this correlation dynamic would be less worrying, and the price action very bullish for BTC,” he added.
Amid Government Economic Actions
During the majority of 2020 so far, governments have taken several actions, including money printing and a $2 trillion stimulus package, in an effort to solve the economic issues brought on by the Covid-19 pandemic. According to Eisma, such actions make bitcoin look appealing, given its proposed role as a store of value or hedge asset. “Empirically so far this year though, when large equity drawdowns occur, BTC sells off,” he added, which shows the asset is not acting as a hedge against traditional markets.
Eisma added:
“There is discussion in the community about whether BTC is a risk asset or digital gold. At times bitcoin seems to have characteristics of both, but it cannot be both—or perhaps it’s some new hybrid asset. Ultimately the characteristics that BTC provides to a portfolio are critical in driving institutional and retail investment.”
Bitcoin has come a long way since its inception more than a decade ago. The asset has achieved a sizable audience of proponents, many of which lobby it as a store of value. Some parties still do not like the asset, however, such as financial commentator Peter Schiff, who prefers gold over bitcoin.
Disclaimer: I actively trade cryptocurrencies, as well as hold a small amount of BTC, ETH, LTC, XMR, NEO, ZEC, BEAM, BCH, DASH, LINK, XTZ and various insignificant other altcoin positions.