Original | Odaily
Author | jk
The price fluctuations of Bitcoin have long presented two completely different trends compared to the traditional financial market, with two completely different narratives behind them: As a risk asset, when market sentiment is high and risk appetite increases, Bitcoin's performance often tends to be similar to that of US stocks, exhibiting a relatively high positive correlation. This is mainly due to the increased participation of institutional investors, making its capital flow pattern similar to other high-risk assets. However, in times of market panic or risk events, Bitcoin will be seen as a safe-haven asset, decoupling from the US stock trend, and even exhibiting a negative correlation, especially when investors lose confidence in the traditional financial system.
These two narratives make the role of Bitcoin more complex, as it becomes part of the risk asset, but may also play the role of a safe-haven asset. Which one will it be? Especially at this time when Trump is about to take office?
Price Correlation: More "Safe-Haven" than US Treasuries
According to TradingView's statistics, over the past decade, the correlation between Bitcoin and the S&P 500 index is 0.17, lower than other alternative assets. For example, the correlation between the S&P GSCI (S&P Goldman Sachs Commodity Index) and the S&P 500 during the same period is 0.42. Although Bitcoin's correlation with the stock market has historically been relatively low, this correlation has increased in recent years. Over the past five years, its correlation has risen to 0.41.
However, Bitcoin's strong volatility makes the correlation data less reliable: The relationship between Bitcoin and the S&P 500 showed a negative correlation of -0.76 around November 11, 2023 (before and after the FTX event), but reached a positive correlation of 0.57 by January 2024.
In comparison, the S&P 500 performs relatively stable, with an average annual return of about 9% to 10%, and serves as a benchmark for the US economy. Although the overall return of the S&P 500 may be lower than Bitcoin, it wins in terms of stability and low volatility.
Comparison of the logarithms of Bitcoin and the Nasdaq index. Source: FRED
It can be seen that during macroeconomic events, the two often exhibit strong correlation: for example, during the market recovery period after the COVID-19 pandemic in 2020, both experienced significant upward trends. This may reflect the increased demand for risk assets under the backdrop of loose monetary policy.
However, during other time periods (such as 2022), the trends of Bitcoin and Nasdaq differ significantly, showing a weakening of correlation, especially during periods when black swan events occur specifically in the crypto market, causing Bitcoin to experience unilateral plunges.
Of course, in terms of cyclical returns, Bitcoin can completely outperform the Nasdaq index. But from the perspective of price correlation data, the correlation between the two is indeed constantly increasing.
A report by WisdomTree also mentioned a similar view, stating that: Although the correlation between Bitcoin and US stocks is not high in absolute terms, this correlation is lower than the correlation between the returns of the S&P 500 index and US Treasuries.
Trillions of dollars in assets globally are benchmarked or seek to track the performance of the S&P 500 index, making it one of the most closely watched indices globally. If an asset could be found with a -1.0 (completely inverse) and relatively stable correlation to the S&P 500 index return, that asset would be highly sought after. This characteristic means that when the S&P 500 index performs negatively, this asset may potentially provide positive returns, exhibiting a hedging characteristic.
Although stocks are generally considered risk assets, US Treasuries are considered by many to be closer to "risk-free" assets. The US government can fulfill its debt obligations through money printing, although the market value of US Treasuries, especially longer-term Treasuries, may still be subject to fluctuations. An important discussion point in 2024 is that the correlation coefficient between the S&P 500 index and US Treasuries is approaching 1.0 (positive correlation 1.0). This means that the two asset classes may rise or fall simultaneously.
Assets rising or falling simultaneously is the opposite of the original intention of hedging. This phenomenon is similar to 2022, when both stocks and bonds recorded negative returns, contradicting the expectations of many investors for risk diversification.
Bitcoin currently does not exhibit a strong hedging capability against the returns of the S&P 500 index. From the data, the correlation between Bitcoin and the S&P 500 index is not significant. However, the recent return correlation between Bitcoin and the S&P 500 index is lower than the return correlation between the S&P 500 index and US Treasuries. If this trend continues, Bitcoin will attract more asset allocators and investors, and gradually become a more attractive investment tool over time.
From this perspective, compared to the risk-free asset of US Treasuries, Bitcoin only needs to be the "faster-running" safe-haven asset to be sufficient, and investors will naturally choose Bitcoin as an investment in their portfolio.
The chart shows the 50-day rolling correlation between Bitcoin price and the S&P 500 index in 2022. On average, the correlation is around 0.1, with a peak above 0.4 and a low below -0.1. Source: WisdomTree
Institutional Holdings: ETF Proportion Increasing
The role of institutional investors in the Bitcoin market is becoming increasingly important. As of now, the distribution of Bitcoin holdings shows a significant increase in the market impact of institutions, and this trend of concentration may further drive the correlation between Bitcoin and US stocks.
According to the data, 19.9 million Bitcoins have been mined so far, out of a total of 21 million, leaving 1.1 million yet to be mined.
Of the Bitcoins that have been mined, the holdings of the top 1,000 dormant addresses, which have been held for more than 5 years, account for 9.15%, equivalent to about 1.82 million Bitcoins. This portion of Bitcoin is usually not circulated in the market, effectively reducing the active supply in the market.
Furthermore, according to Coingecko data, the holdings of the top 20 listed companies, including Microstrategy, account for 2.63%, or about 520,000 Bitcoins, of which Microstrategy alone holds 2.12% (about 440,000 Bitcoins) of the total.
On the other hand, according to data from The Block, the institutional holdings in all ETFs currently amount to 1.17 million Bitcoins.
If we assume that the Bitcoins in dormant addresses, the unmined amount, and the holdings of listed companies remain unchanged, then the theoretical circulating supply = 19.9 - 1.82 - 0.52 = 17.56 million Bitcoins
Institutional holdings proportion: 6.67%
As can be seen, ETF institutions currently control 6.67% of the circulating Bitcoin supply, and this proportion may further increase as more institutions get involved. From the same period last year to this year, we can see that the share from exchanges has been significantly compressed, while the share from ETFs has continued to grow.
Bitcoin holdings proportion. Source: CryptoQuant
Similar to US stocks, as the holdings proportion of institutional investors gradually increases in the market, their investment decisions (such as increasing or decreasing positions) will play a more critical role in price fluctuations. This market concentration phenomenon is likely to make Bitcoin's price trend significantly influenced by the sentiment of the US stock market, especially in the flow of investment funds driven by macroeconomic events.
"Americanization" Process
The impact of US policies on the Bitcoin market is becoming increasingly significant. In this regard, there are currently more unknowns: based on Trump's current style of action, if in the future key policy nodes, crypto-friendly individuals occupy important decision-making positions, such as promoting a more relaxed regulatory environment or approving more Bitcoin-related financial products, the adoption rate of Bitcoin will inevitably further increase. This deepening of adoption will not only consolidate Bitcoin's position as a mainstream asset, but may also further narrow the correlation between Bitcoin and US stocks, which reflect the direction of the US economy.
In summary, the correlation with US stocks is gradually strengthening, the main reasons being the common response of prices to macroeconomic events, the significant impact of institutional holdings on the market, and the potential impact of US policy trends on the market. From this perspective, we can indeed use the performance of US stocks to judge more trends for Bitcoin in the future.
