Bitcoin has often been touted to be a non-correlated asset that can be used to diversify risk in an investment portfolio. This may however be changing according to new data. Reuters reports that since 2020, the correlation between Bitcoin and the S&P 500 index (.SPX) has been increasing positively, causing Bitcoin to follow trends in the stock market. Bitcoin proponents still expect the benchmark cryptocurrency to outgrow this phase.
Bitcoin is being tied to the stock market by institutional investors according to Reuters.
Bitcoin has been maturing over the years and becoming a more mainstream investment choice. This maturity is one of the factors causing the current market volatility in the price of Bitcoin according to a Reuters report.
In the report, Ben McMillan, the chief investment officer of IDX Digital Assets, noted that the growing inclusion of Bitcoin in the investment portfolio of institutions makes the current market crash of Bitcoin in the face of an interest rate hike by the Fed unsurprising.
Now that bitcoin is not entirely held by early adopters, it’s sitting in a 60/40 type portfolio. It’s not surprising that it’s starting to trade with a lot more sensitivity to interest rates, McMillan noted.
The report notes that the correlation between the price movements of the S&P 500 index and Bitcoin has been rising constantly since 2020. The two asset classes showed very little correlation (0.01) in the Fed’s last tightening cycle in 2017-2019. But since then, the correlation has increased to currently having a more significant relationship (0.41).
This is just another phase that will be outgrown according to Bitcoin proponents.
While the data showing that Bitcoin tracking traditional assets more closely is hard to refute, crypto proponents consider it to be a necessary phase in Bitcoin’s journey to becoming the global unit of account. Bitcoin started off its adoption run with retail investors, is at the level of institutional adoption, and will ultimately become adopted globally. Bitcoin proponent Alex Gladstein noted:
“There will likely come a point where US monetary policy is mostly irrelevant to Bitcoin’s price, but we are far from such an era. For now, Bitcoin will react strongly to monetary policy.”