To The Moon

As we can see over the last few days, we have seen Bitcoin hovering around $51,000. There have been report that Spot Bitcoin ETFs is the driving force behind the Bitcoin rally.

But what about the stocks performance when Bitcoin rally and I would think i is important to understand the correlation between Bitcoin and stocks.

Institutional adoption and Spot Bitcoin ETFs has driven higher correlations between crypto and other risk assets. Crypto evangelists have had a long-standing infatuation for correlation, or the absence of it. Touted as a safe haven asset, uncorrelated from traditional stocks, bitcoin is supposed to be a hedge against the excesses of Wall Street.

To make understanding simple for correlation, it help to inform investors about the relationship between financial assets and indices. If the price of two assets rises in lockstep, they are said to be positively correlated, with a correlation of 1 indicating a perfect positive correlation. The inverse, a correlation of -1, would represent a perfect negative relationship.

Correlation Between Bitcoin and S&P 500

The correlation between bitcoin and the NDX/SPX ratio was consistently positive during the 2022 bear market and between May 2020 and March 2021, when the cryptocurrency rallied nearly tenfold to $60,000.

And if we look at the most recent correlation coefficient, we can see that it is rising alongside with Bitcoin rally. Something we need to take note is when S&P 500 is affected by any monetary policy, we could see similar reaction from Bitcoin.

If we were to include Bitcoin in a portfolio, which is a diversification from traditional stocks. From 2010 to 2020, those who believe that Crypto would not make it, have their wishes. Bitcoin's correlation to the S&P 500 remained at negative or low positive levels, indicating that bitcoin did not sing to the tune of conventional assets.

But things are different especially after the pandemic.

30-day bitcoin correlations with gold and the S&P 500

Much has changed since COVID-19. Data from 21Shares captures a stark regime change, with bitcoin's correlation to the S&P 500 and Nasdaq 100 shooting from a negative correlation of -0.15 to a positive 0.31 between January and April 2020.

As bitcoin's correlation has surpassed a value of 0.5 – a strong positive correlation – and the ‘decoupled-safe haven’ hypothesis remains on hold, what can correlations tell us about crypto investors, the current market regime and the future of the industry.

Look Out For Similarities When Considering Bitcoin vs S&P 500

Robust performance with loose monetary policy

One similarity that both Bitcoin and the S&P 500 share is that they excel during periods of loose monetary policy, when central banks aim to stimulate the economy, for example, by lowering interest rates. Though we might be aware that stimulus packages and low interest rates lead to more funds flowing into the asset market, it is crucial for us to understand why it happen this way.

During stages of quantitative easing, central banks tend to purchase government bonds, which inject liquidity into the economy. This creates an environment of low interest rates, so businesses and individuals can secure loans while minimizing their cost of borrowing said funds.

This was the case during the Covid-19 pandemic, when businesses went out of their way to make big purchases to take advantage of the favorable, near-zero interest rates. This boosted the overall growth that tech companies could achieve, leading to pandemic stocks like Peloton, $Zoom(ZM)$ and DocuSign reaching all-time highs as forecasted demand and revenue levels grew by numerous multiples.

Ultimately, that is how the $S&P 500(.SPX)$ managed to recover from its February 2020 dip so quickly as businesses were quick to react to the favorable interest rates and take advantage of the low cost of borrowing.

Similarly, as with the case of Bitcoin, traders also began to inject more funds into the crypto market and speculated rampantly thanks to easy access to funds and stimulus checks issued by the government. This eventually led to Bitcoin reaching an all-time high right before the federal government pulled the plug by raising interest rates.

This might be even more true now as we can see Spot Bitcoin ETFs have more funds inflow when the Spot Bitcoin ETFs approval was announced, we have seen a pretty consistent fund inflow into BTC on the exchanges.

Summary

Based on what I have observed, the correlation between crypto(BTC) and stocks have been rising, this is further catalysed by the Spot Bitcoin ETFs, we should be seeing more fund inflows from the ETFs, as Bitcoin price continue to rally.

While we watch how S&P 500 have passed the $5,000, maybe it is time for us to consider some Spot Bitcoin ETFs like $iShares Bitcoin Trust(IBIT)$ $ARK 21Shares Bitcoin ETF(ARKB)$ into our portfolio, this is to take advantage of the correlation rise.

Appreciate if you could share your thoughts in the comment section whether you think correlation between Bitcoin and Stocks will continue to rise while Bitcoin rally to $60k.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.