Since Satoshi penned his blueprint on bitcoin’s whitepaper in 2009, the invention has maintained a low correlation to stocks, including bonds, commodities, and equities. This weak affiliation to traditional asset classes has made bitcoin a lucrative asset for investors looking to diversify their portfolios. 

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However, bitcoin’s correlation to stocks has been steadily rising in recent months, as the asset class sees increased adoption. More financial institutions and Wall Street giants embrace bitcoin, while companies such as PayPal and Visa have added support for the flagship crypto on their payment networks.  

Could the king coin’s entrance to the mainstream by making it more tied to the legacy financial system that it is supposed to replace? Let us take a deep look at the correlation between commodities and crypto in recent years. 

Bitcoin’s Reputation as an Uncorrelated Asset

Bitcoin was invented to introduce a new counterculture in finance following the collapse of the banking system in 2008. Satoshi and the anarchist libertarians behind BTC set out to create a new deflationary form of digital money that excluded governments and financial institutions that had eroded public trust.

Over the past decade or so, bitcoin has served its purpose as a hedging instrument during times of economic downturn, leading crypto proponents to revere it as “digital gold.”

The world’s first cryptocurrency’s growing reputation as a safe haven in times of financial crisis stem from its fixed supply that makes it resistant to inflation. The coin is also fully decentralized, meaning that central banks cannot manipulate its value.

A recent example of when BTC proved its status as an uncorrelated asset was in April and May of 2019, when the token scaled new heights as stocks struggled. The crypto logged a sharp bullish move, jumping  69%, while the S&P 500 dipped over 7%  during that period. 

More recently, in May 2021, trading boomed in the digital assets market while volumes in equities and stocks slowed down as more institutional investors shifted their attention to crypto.

Activity picked up in crypto exchanges and derivatives, leading to volumes rocketing to $1.7 trillion in May, up from $100B the previous month.

In stark contrast, US equities tumbled 27%, demonstrating that crypto markets often move in the opposite direction to stock markets. Low correlation to stocks is crucial for crypto investors, as it gives them numerous portfolio diversification benefits.

Bitcoin’s Bond to Stocks over the Past Three Years

A report released earlier this year by VanEck confirmed BTC behaved as an uncorrelated asset, moving in the opposite direction to bonds and indexes such as the S&P 500 between 2013 and 2019. 

However, a closer look at the bond between BTC and the S&P 500 shows that correlation patterns are taking a different turn. The correlation between the world’s largest stock index and the world’s first crypto rose to an eight-year high in 2020.

The S&P 500 has seen several dips in the past three years, with the most notable one being a 31.7% crash in Feb-March of 2020. During this period, BTC behaved similarly, slumping by a whopping 51.6% in May during the historic Black Thursday Crash.

Interestingly, the forces tying BTC to stocks strengthened between 2018 and 2020, with the three most significant dips in the stock markets over that period coinciding with major retracements in crypto markets. 

Data from VanEck confirms that bitcoin’s correlation to the S&P 500 moved back and forth over the past three years. The coin was positively correlated in 2018 with a coefficient of 0.04. It then became negatively correlated to the leading index in 2019 with a coefficient of -0.09 before finally moving in the same direction with stocks in 2020.

For an asset that is often touted as uncorrelated with most traditional investments, BTC has pretty much moved in the same direction as the Nasdaq and S&P 500 over the past three years.

That said, the correlation to stocks between 2018 and 2020 is still relatively weak compared to bitcoin’s relationship with gold, a rival safe-haven asset.

BTC Price Correlation with Stocks in 2021

The realized correlation between BTC and stock markets has been on a downtick since the turn of the New Year as BTC experienced a strong uptrend that took it to fresh new highs in April.

In that period, the stock market also recovered as the global economy bounced back from the Covid-19 induced lockdowns. However, BTC roared upwards at a much higher rate, doubling in value while the S&P 500 index jumped only 8.5%. 

The two markets are starting to move out of sync, much to the delight of BTC hodlers who have been adamant that bitcoin will eventually break its correlation with stocks and tread its own independent path.

The decoupling seen in recent months shows that the BTC market is maturing and is now less influenced by the macroeconomic factors that adversely affect traditional stocks.

Crypto proponents firmly believe that bitcoin’s ebbing correlation with stocks in the past few months is proof that the asset has the potential to establish itself as a haven asset. 

Bitcoin Can Affect the Stock Markets

BTC has been gradually decoupling from stocks in recent times, with the correlation dropping below zero in March 2021 for the first time since Jan of last year.

Per a recent report by DBS, a Singapore-based bank, bitcoin is coming out of the fringes of global finance and can have a significant knock-on effect on commodities. The DBS study, which examined the shifting relationship between crypto and assets such as bonds and equities, found that the average correlation remains low at 0.20.

The waning link with stocks in 2021 indicates that BTC is gearing up to become more like digital gold rather than just another investment instrument within the conventional fiscal system.

Final Thoughts 

Stocks and gold have been on relatively bullish markets since the May 2020 global economic crash. However, BTC has managed to outperform both asset classes as the coin continues to gain appeal among high-profile investors. 

Behemoths of Wall Street continue to attempt to influence the crypto market to deter the asset class from decoupling from stocks. Still, evidence from the past few months shows that digital assets are breaking away from the traditional finance system.

Bitcoin looks well primed to establish itself as “digital gold,” giving investors an alternative to the stock market often influenced by macroeconomic factors such as unemployment and hyperinflation.