A Look at Rising Correlation Between Bitcoin and Traditional Financial Markets

In this article we look at Bitcoin's increasing correlation to equities, and the stellar returns on offer in this space.

04:16 02 February 2022

A decade ago, a debate on a new-age digital token like Bitcoin going mainstream would have met with overwhelming criticism from detractors, generating barely any interest at all.

 

But the situation has changed and how.

 

Bitcoin has turned into a different monster now. It announced itself on the big stage of mainstream finance with an incredibly impressive run-up to record highs, leading many to make interesting comparisons.

 

Some refer to bitcoin as the digital gold for its store of value and for it being a hedge against inflation, but there are those who think it's not the right comparison to make. Using such a reference may be a bit of an exaggeration given the extreme degree of volatility in the Bitcoin market and the frequency with which it shuffles through the boom and bust phases.

 

By that logic, stock markets appear to be a much more realistic comparison, for they exhibit similar levels of volatility and go through their own share of peaks and valleys although not as often as the cryptocurrencies. 

 

What does the data tell us?

 

Two Peas in a Pod

Initially, traders and investors rushed to the crypto scene with the aim of getting exposure to cryptographic assets hoping they're inherently different from their counterparts in equities, bonds, and other traditional avenues of investment. They were right in thinking so.

 

Bitcoin, and, by that extension, cryptocurrencies were not meant to show any correlation with stocks. That was the case for a long time but that situation changed when in 2021 the first Bitcoin-linked future ETF from the stable of Proshares listed on NYSE having direct exposure to bitcoin.

 

But that was not an aberration at all.

 

Data indicates that bitcoin and equity markets are now starting to move in lockstep more than ever, rubbishing views that it's an asset highly uncorrelated from traditional markets.

 

As a refresher, correlation signifies the extent to which assets perform in relation to each other. A correlation coefficient of 1 means the assets are nearly moving in tandem, while a correlation of 0 shows there's no underlying correlation, and a correlation of -1 indicates they're moving in opposite directions.

 

In simple terms, the data points out that bitcoin is a volatile asset that tends to perform well when stock markets do well, and vice versa. That explains why a lot of traders are gravitating from stock markets to the crypto scene.

 

The volatility and the amount of profit potential on offer in the crypto space is mouth-watering and hard to ignore. Check out profitbuilder-app.com/de to know how its sophisticated trading platform has been instrumental in helping traders make profits at a very low level of risk.

 

Amazing Returns, Year after Year

There's another key factor that underscores Bitcoin's similarity with stock markets: rate of returns.

 

Bitcoin is up approximately 20% YOY, and that's comparable to the S&P 500 index's gain in the same period, 18% over the last 12 months.

 

Let's take a look at BTC's performance over the recent years.

 

Bitcoin's annual return in 2018 was a miserable -72.6%. But the digital token put that dismal year behind it to finish 2019 strong with 87.2% returns. 2020 was no different, with the bellwether currency waking up and going on a tear to post over 300% returns; that's 3x in just 52 weeks, rounding off a ginormous year. But it didn't rest on its laurels and followed through that path-breaking year with another excellent performance in 2021, when investors saw their money grow by over 60%.

 

Bitcoin's returns have been lucrative of late, much higher than any stock market index with industry-beating performance in the same period. 

 

But here's an interesting observation for you.

 

The worst annual return you'd have, if you had put your money into Bitcoin any day since its launch and held on to it for 5 years, would be 27%. In other words, suppose you picked the worst day possible to go long but showed nerves of steel to hodl your way through thick and thin for five long years, you'd have ended up making 27% returns annually. How about that?

 

This speaks volumes of how important it is to stay put in the market with a clear, long-term outlook. 

 

Things are Looking Up Despite Current Market Conditions

Bitcoin has come a long way, but certain issues regarding regulation, environmental concerns are still up for debate. For their part, critics still keep pooh-poohing the whole idea of crypto and investing into a finance ecosystem where things are decentralized and unregulated.

 

But there is a definite shift in overall perspective, which comes through in the rising demand at every level possible- retail investors, institutions, tech companies and even countries like El Salvador. The degree of adoption and uptake that we are starting to see in this space is really encouraging, dousing all the fears and negative news in the wake of the recent slump.

 

Let’s face it. This has been a pretty bad fall, indeed. Bitcoin and other leading cryptocurrencies with huge market caps have nosedived. The market is still on the path to recovery with no signs of a bullish response yet. It is still lackluster, operating in a tight range, and there is no clear direction as to which way the trend will extend.

 

But a lot of positive developments are happening on different fronts: regulating cryptocurrencies seems to be on the agenda in many countries across the globe; blue-chip companies are ramping up efforts for putting in place the infrastructure and resources needed to incorporate blockchain technology and crypto tokens into their offerings.

 

As the regulatory pressure begins de-escalating all around, more and more traders and investors will enter the market with renewed confidence and do their bit to help bitcoin up and send it on its way to the ‘moon’.