Stronger Positive Correlation Between Bitcoin and Equity Market.
Hello friends. A warm welcome to new readers and subscribers. I am glad you are here!
The current year’s (2022) market conditions are overwhelmingly confirming an atypically strong positive correlation between bitcoin (BTC) and the world’s largest, and most globally traded equity market, meaning, BTC and the US equity market are consistently moving more and more in the same direction. Considering that Bitcoin is a decentralised asset class and has characteristics fundamentally different to equities, this relationship is an anomaly and signals a widely proliferated psychology vital to look at.
Today at a glance:
Bitcoin and equity markets are moving more and more in the same direction.
Since its infancy, BTC has been widely accepted and preached by most proponents as a diversifiable asset - meaning in a given portfolio it should provide asymmetric (opposing) returns in comparison to other assets influenced by the same market or economic conditions, based on its characteristics. it is made for difficult, uncertain, and tectonic socio-economic and market conditions.
For the past three years, we have been experiencing nothing short of those; difficult, uncertain, and tectonic, socio-economic and market conditions, globally and locally in South Africa - Military war inducing geopolitics, trade and economic wars, capital wars, technology wars, surging interest, inflation, and unemployment rates coupled with aggressive power outages in South Africa, and a R22 million continuous education flag that ‘lits.’
These are the times BTC is made for - the time to store investor value and be a haven when most or all other assets are plummeting. How has BTC really performed in comparison with the US equity market ? Using the S&P 500 and Nasdaq Composite (Index) as proxies for the US equity market (New York Stock Exchange and Nasdaq – stock exchange).
What is highly evident, from the graph above, is that; BTC price and two indexes move more and more strongly in the same direction. Especially just after October 2021.
During the period where COVID-19 consequences were most widely felt and priced, in goods and services, all forms of wars (military war, trade and economic wars, capital wars, technology wars) at heightened play, rising interest, inflation, and unemployment rates, BTC behaved the same way as the US equity market – screeming ‘lack of diverseness.’
This is strange, and one perspective might point out to bitcoin as an inefficient asset – and having failed its fundamental role, but more deeply it all plays down to market participants, what their strategies are and how they eventually behave/execute - and we see that the most widely executed strategy is reflected well in market behaviour.
There are, most evidently, two types of investors that identify BTC as an investable asset, and influence it’s market behaviour
Investors keenly looking at the fundamentals of what BTC is – see BTC as a hedge/reserve just like what gold has proven to be and investing accordingly.
Investors grouping BTC as a risk asset along with equities, with minimal consideration of fundamentals and investing accordingly.
What we see is that those in the first cohort are convicted investors looking at a long-term horizon, and irrespective of market or economic conditions, they expect asymmetric returns, hence holding on to the asset and not selling in tough conditions nor buying because of rises in good conditiond, rather ‘Doller cost average’ through time – divide the total amount to be invested in an asset across a long period.
The second cohort see BTC as a risk asset, and when market or economic conditions are tectonic, or good, BTC should provide symmetric returns like other risk assets (equities) hence when market conditions are bad, negative expectations lead to them selling and vice versa.
It seems then that there are more investors with that psychology, in the second cohort - then driving BTC to behave in the same way as equities, resulting in a strong positive correlation, we have seen for the past year.
The short to medium term (periodic tumultuous economic or market conditions) narrative is being driven by risk perceiving investors and that is how the market is structured.
It is a strange relationship, but it goes without saying that most behaviour in financial markets is strange.
To be in a utopian world where everything is in order, the BTC market structure would have to shift so that more individuals holding BTC are in first cohort than the latter, but for as long as we are not in a utopian world, the most widely executed strategy drives the narrative.
Talk to you soon! Stay Curious
-Kusa Nkosi