It’s not just the cryptocurrency market that’s crashing this month – traditional stock markets are doing just as badly. In fact, Bitcoin and its fellow cryptocurrencies are moving in closer correlation with traditional stocks than ever before. Over the past few weeks, Bitcoin’s 40-day correlation coefficient with the Nasdaq 100 has reached a factor of 0.66 – the closest correlation ever witnessed in data compiled by Bloomberg since 2010.
Correlation with the S&P 500, another popular index fund, has increased to 0.41, up from only 0.1 in September last year. The metric is measured as a fraction between 0 and 1, with 0 being no correlation and 1, perfectly correlated. For context, Bitcoin had an average 0.01 correlation between 2017 and 2019 – 40 times less than now.
The cryptocurrency, born in 2009, was still on the fringes of finance during the Fed's previous tightening cycle, from 2016 to 2019, and was barely correlated with the stock market#inflation #Bitcoin #cryptocurrecyhttps://t.co/Fxz463O5xA
— Business Standard (@bsindia) January 25, 2022
For those looking to use Bitcoin as a hedge against traditional market dips, this is bad news. However, it’s not particularly surprising. Over the past year, large financial institutions have been creating new ways for traditional investors to get involved with cryptocurrencies. Much of this has attracted hype and positive sentiment from the community, as it’s perceived as more money for crypto and a ‘number go up’ mentality.
Unfortunately, this also means we get big money investors treating their crypto portfolios like their other stocks and dumping in times of uncertainty. Bitcoiners, on the other hand, who are committed to the cult of ‘HODL’, usually buy more when markets get shaky. So while institutional investors may push the price up, they could also threaten Bitcoin’s position as a hedge against a traditional market decline.