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 in line with the US stock market, showing 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 market trend, and even showing 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 statistics from TradingView, 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 S&P Goldman Sachs Commodity Index has a correlation of 0.42 with the S&P 500 during the same period. 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 in January 2024.
In comparison, the S&P 500 is 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 rate of the S&P 500 may be lower than Bitcoin, it wins in terms of stability and low volatility.
It can be seen that during major macroeconomic events, the two usually show strong correlation: for example, during the market recovery period after the COVID-19 pandemic in 2020, both showed a significant upward trend. This may reflect the increased demand for risk assets by investors against the backdrop of loose monetary policy.
However, during other time periods (such as 2022), the performance of Bitcoin and Nasdaq differed significantly, showing a weakening of the correlation, especially during the time periods when black swan events specific to the crypto market occurred, when Bitcoin experienced unilateral plunges.
Of course, in terms of cyclical returns, Bitcoin can easily outperform the Nasdaq index. But looking solely at the data on price correlation, the correlation between the two is indeed 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 return correlation between 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 can 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 feature means that when the S&P 500 index performs negatively, this asset may 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 by printing money, although the market value of US Treasuries, especially longer-term Treasuries, may still be volatile. 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 during the same time period.
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, which contradicted the expectations of many investors for risk diversification.
Bitcoin currently does not exhibit a strong hedging ability against the returns of the S&P 500 index. The data shows that 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 runner" safe-haven asset, and investors will naturally choose Bitcoin as an investment in their portfolio.
Institutional Holdings: ETF Share Increasing
The role of institutional investors in the Bitcoin market is becoming increasingly important. To date, 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 with over 5 years of age account for 9.15%, equivalent to about 1.82 million Bitcoins. This portion of Bitcoin is usually not put into circulation, 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).
On the other hand, according to data from The Block, as of the time of writing this article, the institutional holdings of all ETFs have reached 1.17 million Bitcoins.
· Assuming the Bitcoin in dormant addresses, the unminedamount, and the holdings of listed companies remain unchanged, the theoretical circulating supply = 19.9 - 1.82 - 0.52 = 17.56 million Bitcoins
· Institutional holdings share: 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.
Similar to US stocks, as the holding share 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.
The "Americanization" Process
The influence of US policies on the Bitcoin market is becoming increasingly significant. In this regard, there are currently more unknowns: According to Trump's current style, if crypto-friendly individuals occupy important decision-making positions at key policy nodes in the future, such as promoting a more relaxed regulatory environment or approving more Bitcoin-related financial products, the adoption 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, two assets that reflect the direction of the US economy.
In summary, the correlation with the US stock market is gradually increasing, 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 trend of the US stock market to judge more about the trend of Bitcoin.
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