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From Safe Haven to Stock’s Closest Friend: Bitcoin’s Relationship with Traditional Assets

Since the first block was mined in 2009, Bitcoin has transformed from a protocol shared between students on dorm room computers, to a multi-billion dollar financial network running on nodes all the way from New York to Outer Mongolia.

Along the way, the cryptocurrency has gone from playing by its own rules, to mirroring the price action of traditional assets.

Some claim Bitcoin is a digital safe haven with strong correlations to gold. Some say the cryptocurrency follows the S&P 500. And others claim it has an inverse correlation with the Chinese yuan (CNY).

But are these relationships just coincidences that change with the wind, or is there a long-term correlation to be found between bitcoin and the traditional financial world?

Bitcoin’s Correlation With the Yuan

From 2015 to 2016, Bitcoin showed an inverse correlation with the Chinese yuan. This caught the attention of analysts when U.S-China trade war tensions escalated and the yuan fell 7% as bitcoin pushed upwards.

One theory is that Chinese citizens were using Bitcoin to evade capital controls and hedge against the yuan’s depreciation.

Through the bank, citizens could only legally move $50,000 abroad each year, but with bitcoin they could send yuan to crypto exchanges to be swapped for a less volatile currency, park the funds in a stablecoin, or withdraw funds to an overseas bank account.

As more than 95% of global bitcoin trading* took place against the yuan on Chinese exchanges at the time, analysts suggested this movement of capital was leading the two assets in opposite directions.

Correlation or Coincidence?

Before any data on the correlation could be collected, this relationship dissolved as the bull run of 2017 began and bitcoin surged despite a rising yuan.

Bitcoin’s Correlation With Gold

Bitcoin was forged in the fiery economic collapse of 2008, and has since come to sit alongside gold as a reminder that an alternative financial system is possible..

The correlation between the two assets first showed itself in March 2013 with the Cypriot financial crisis. As panic spread and long queues formed outside cash machines, bitcoin rallied alongside gold.

Since then, this relationship has resurfaced in times of uncertainty, much like in January of this year, when tensions between the U.S. and Iran caused both bitcoin and gold to simultaneously skyrocket.

Correlation or Coincidence?

In the most recent coronavirus-induced market sell-off, bitcoin and gold stuck together like never before, leading intrigued analysts to measure the correlation.

A study published by VanEck found that over the past five years, bitcoin’s correlation with gold was 0.42 — a figure that increased to 0.49 in the market turmoil of March 2020. Any correlation between 0.5 and 0.7 is considered moderate statistically, suggesting that major moves in one asset are likely to trigger big moves in the other.

Bitcoin’s Correlation With the S&P 500

Naysayers of the “digital gold” narrative suggest bitcoin doesn’t behave like a safe haven asset, and actually moves in tandem with U.S. stock index the S&P 500.

Because bitcoin has only ever existed in the decade-long equities bull market from 2008, It may have only been benefitting from the same appetite for risk that led tech stocks like Apple and Amazon higher.

When coronavirus fears reared their ugly head, the darkside of this relationship was exposed as bitcoin and stocks plummeted together.

Correlation or Coincidence?

Figures from VanEck show only a weak correlation between stocks and bitcoin, albeit one that has got stronger in recent weeks. Over the last year, bitcoin has had a correlation of 0.13 with the S&P 500. This increased to 0.15 in the last four weeks.

Growing Relationships

Compared to the 200-year-old U.S. stock market and the ancient metal gold, the decade-old bitcoin is a youngster. And all correlations up to this point could be thought of as the short-term flings of an asset coming of age.

With a moderate correlation, gold is the most correlated asset to bitcoin thus far. But, the cryptocurrency still remains mostly non-correlated and its status is likely to change as more traders enter the market and the ecosystem continues to expand.

* https://data.bitcoinity.org/markets/volume/5y?c=e&t=b

 

 

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