Market analysts have repeatedly asked whether stocks and bitcoin are correlated.
Long story short, it depends on one’s time frame.
In the short-term, there are certainly instances where stocks and the digital currency have moved in tandem.
During 2017, for example, both stocks and digital currencies experienced notable gains.
Then, earlier this year, when both asset classes started plummeting, it once again appeared the two were following each other closely.
[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.]
Sentiment’s Key Role
Sentiment can play a crucial role in situations where both more traditional assets (stocks) and more novel assets (cryptocurrencies) display significant correlations.
These instances are frequently driven by events that motivate investors to move in aggregate, flocking to one type of asset (for example, assets perceived as strong safe havens).
“Investors enter markets when they are optimistic, traditional or digital,” emphasized Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital.
“They tend to exit when sentiment is negative,” he added.
Taking A Deeper Look
While short-term analyses of stocks and cryptocurrencies may illustrate notable correlations, the story changes when observed through a broader lens.
In the long-term, the correlation between the two is rather weak, according to Bloomberg data compiled by U.S.-based asset manager Blockforce Capital.
The Blockforce analysis, which looked at bitcoin and the Standard & Poor’s 500 Index (S&P 500) from January 2015 through Oct. 11, 2018, found that the correlation during this period was not substantial.
“Historically, the correlation between the S&P 500 and Bitcoin has been insignificant. Although correlation values between the two asset classes has ticked up this year versus historical averages, with the current correlation hovering around .11, we believe this to be an insignificant value and don’t believe the two markets to be related,” said Blockforce CEO Eric Ervin.
“While most people talk about how Bitcoin is not correlated to the S&P 500, it’s important to recognize that not being correlated is not the same as being negatively correlated,” stated Ervin.
A Shifting Mindset?
Going forward, the situation could change, noted analyst Tim Enneking, as more “traditional” investors, as in those more experienced with assets like stocks and bonds, enter the space.
As more of these market participants get involved with digital currencies, it could result in the correlation between stocks and digital currencies pushing higher.
One of cryptocurrency’s “historical advantages has always been the absence of correlation to fiat investment classes,” noted Enneking, managing director of Digital Capital Management.
“If correlation were to increase on a sustained basis, it would make crypto a far less attractive investment,” he said.
Disclosure: I own some bitcoin, bitcoin cash and ether.