Is the massive institutional interest in bitcoin making the world’s biggest digital currency act like the stock market?
According to Morgan Stanley, the degree to which bitcoin
and the S&P 500
have been moving in tandem with each other has been rising of late, and while they’re not a perfect match, it could diminish the cryptocurrency’s value as a tool for diversification.
Currently, the trailing 30-day correlation between the S&P 500 and bitcoin stands at about 0.3, according to data provided by the investment bank. A reading of 1.0 would represent perfect correlation, while -1.0 would indicate perfect inverse correlation. A reading of zero would represent no correlation whatsoever.
The level of correlation between stocks and the world’s biggest digital currency has been extremely volatile. It hit a recent low of about -0.15 in November, and has largely risen since. Earlier this year, correlations stood at zero before shooting upward. That rise coincides with the notoriously volatile bitcoin tumbling from its December peak and — more recently — stocks, which have been historically quiet in recent months, retreating from their own record high.
Opinion: Will U.S. stocks suffer the same fate as bitcoin?
“We can see that bitcoin’s correlation to the broader market has in fact increased, but the current level of correlation still stands below previous periods in the past 14 months,” Morgan Stanley wrote in a note to clients, referring to how the correlation touched 0.35 last June. “Looking at the overall trend during that period, it is clear that correlation with the broader equity market has not been fully established in the data.”
The investment bank speculated that increased institutionalization of the bitcoin market — for example, the rising number of hedge funds dedicated to cryptocurrencies — “may have opened a path to increased correlation,” as it is no longer small retail investors driving the action.
“The idea is that as institutional investors seek out increasingly higher levels of risk/return, that bitcoin may represent the most risky/potentially highest return available, and hence could be evolving quickly into a primary barometer/leading indicator for broader financial markets and risk appetite,” it wrote.
If correlations between bitcoin and stocks remain elevated, that could diminish one of bitcoin’s chief selling points, Morgan Stanley speculated. “One of the historically mentioned benefits of bitcoin as an investment is that it has been almost wholly uncorrelated with other financial markets,” it wrote.
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