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- It appears the correlation between bitcoin (BTC-USD) and stocks (SP500) has strengthened since the start of 2022 amid increased cryptocurrency adoption, suggesting that the largest digital token by market cap acts more like a risk asset, according to a recent blog post from the International Monetary Fund.
- In fact, the rolling 20-day correlation of bitcoin (BTC-USD) and the S&P 500 index (SP500) jumps above 0.7, the highest level seen since Oct. 2020, Charles Schwab Chief Investment Officer Liz Ann Sonders writes in a Twitter post.
- However, before the pandemic started, bitcoin (BTC-USD) and ethereum (ETH-USD), the second-largest digital coin, showed little correlation with major stock indices, the IMF notes. But this changed after the Federal Reserve and other central banks' unprecedented monetary response to COVID-19.
- "Crypto prices and U.S. stocks both surged amid easy global financial conditions and greater investor risk appetite," the blog reads.
- Note that bitcoin (BTC-USD) +495% and the S&P 500 (SP500) +49% yield extraordinary returns since the onset of 2020, though returns are more modest on a Y/Y basis, and trade in net negative territory M/M.
- Additionally, bitcoin (BTC-USD) "has been behaving more as a risk asset recently amidst market uncertainties," Stack Funds Head of Research Lennard Neo told CoinDesk. "The markets are still split if BTC is an inflationary hedge or risk asset, and with the current macro climate, expect more volatility in the short term," he adds.
- Bitcoin volatility explains about one-sixth of S&P 500 (SP500) volatility during the pandemic, and about one-tenth of the variation in S&P 500 returns, the IMF reports. As a result, declining BTC prices can increase investor aversion and lead to a fall in investment in stock markets.
- Moreover, spillovers from stablecoin Tether (USDT-USD), a digital currency that's pegged to the U.S. dollar, to global equity markets increased throughout the pandemic, though it remains smaller than those of Bitcoin (BTC-USD), explaining about 4% to 7% of the variation in U.S. equity returns and volatility, according to the IMF.
- Who is entering the digital asset market?
- Cryptos and blockchain technologies are finding increased usage in developing nations. For example, in the wake of the Turkish lira's massive devaluation against the U.S. dollar in a backdrop of soaring inflation, Turks seem to be abandoning the fiat currency for digital assets as crypto trading volumes using the lira climb to an average of nearly $2B per day. Additionally, Mexico and Jamaica are testing out central bank digital currencies, as well as Nigeria, which already launched a CBDC last year.
- Of course, El Salvador, the first country to make bitcoin (BTC-USD) legal tender, has been getting involved with crypto through a variety of initiatives, including buying and hodling BTC, and more recently it prepared 20 bills to provide a legal foundation for issuing bitcoin bonds.
- See how bitcoin correlates with other asset classes as well.