The nascent digital assets market, through the course of 2017 to late 2018, was observed to ebb and flow in a similar fashion to the more established, institutional stock market. What experts could not immediately establish, however, is whether or not one market mimicked the other or the correlation was merely a coincidence.
The digital assets market is virtually insignificant when put in comparison to it’s older, institutional counterpart. Earlier valued at $133,089,617,569, the cryptocurrency market was dwarfed by the NYSE’s (New York Stock Exchange) over $21 billion total market capitalization but has somehow made such an impact that it has attracted comparisons to more robust and sophisticated markets.
Due to digital assets representing a paradigm shift in, not just how humanity interacts with value, but an impending overhaul of just about all incumbent administrative systems and processes, especially processes that traditionally require trusted third party authorization. Cryptocurrencies and the technology that underpins the upstart asset class, blockchain, are hence put under the proverbial microscope, as there are as yet, no guidelines or drawn game-plan regarding the various aspects of digital assets.
How Do The Markets Tick?
Traders are always looking for an edge, and one supposes it would only be natural to look for a correlation between the stock market and cryptocurrencies despite their disparate market capitalizations and levels of volatility. A number of institutions have analyzed both markets to find similarities in price movements.
Most recently, Blockforce Capital, studied the Standard & Poor’s 500 Index ( S&P 500) and Bitcoin over a period of three years, between the beginning of 2015 to the end of 2018. What Blockforce found was a marginal correlation between the two markets, despite Funstrat’s Tom Lee stating that ‘’Cryptocurrencies have their own economy based on activity on that Blockchain. Equities have their own economy based on earnings per share multiples. The institutional overlap is essentially zero”.
“It would be a funny world if bitcoin did not correlate with other markets because anything linked to ‘fiat’ is a conduit for hedging and arbitrage where lots of potentially easy money is to be had. This is especially true for immature assets like bitcoin where the armies of traders have not refined their armament into the super-efficient penny-stealing ‘algos’ that grace older markets.” According to a Forbes article, dated 16 Oct. 2018.
Eric Ervin, CEO of Blockforce Capital commented“Historically, the correlation between the S&P 500 and Bitcoin has been insignificant. Although correlation values between the two asset classes have ticked up this year versus historical averages, with the current correlation hovering around .11, we believe this to be an insignificant value and don’t believe the two markets to be related. While most people talk about how Bitcoin is not correlated to the S&P 500, it’s important to recognize that not being correlated is not the same as being negatively correlated.”
Blockforce Capital observes three holding periods of 90 days, 30 days and 10 days found that cryptocurrency prices, Bitcoin, in particular, had a 33%, 52%, and 79% correlation for the respective holding periods. The company points to the growth in the popularity in digital assets as a cause for the high levels of correlation for the period in which the analysis was conducted.
An increase in parallel trends between the stock market and cryptocurrencies market is likely if the, highly anticipated, institutional investors come flooding into digital assets. For now, any correlation between the markets is mostly based on sentiment as opposed to facts, according to Blockforce. If market correlation increases, warns Blockforce, then cryptocurrencies could lose their appeal.
“One of cryptocurrency’s historical advantages has always been the absence of correlation to fiat investment classes. If correlation were to increase on a sustained basis, it would make crypto a far less attractive investment.” opines Tim Enneking, managing director of Digital Capital Management on the matter.
Tom Forrester and Doug Ramsey, CIO’s at Forrester Capital Management and Leuthold Group respectively, seem to be of a different opinion regarding the correlation between equity and cryptocurrency markets. They believe Bitcoin’s volatility could make it a useful indicator of market crashes as the riskiest assets are usually first to experience a price tumble.
What Makes The Markets Tick?
There are certain types of news events that affect the markets both negatively and positively when the market correlation is low, specific types are news usually cause and upward or downward trend in cryptocurrency prices.
Regulations: Governments all over the globe are beginning to come to recognize cryptocurrencies as either legal assets or actual currencies and are thus classifying and experimenting with regulatory measures for the fledgling asset class. Regulatory moves in crypto’s largest markets are bound to set prices off. Regulatory moves that would restrict the use of digital assets are usually taken badly by the market, whereas more crypto-friendly regulations tend to trigger positive price movements.
Security Breaches: The digital assets sphere is notorious for security breaches by teams of hackers who make off with large amounts of money. The highly speculative state of cryptocurrency markets usually sends prices from support level to support level when news of a wallet of currency exchange being hacked begins to spread.
Current Affairs: With More sophisticated investors entering the digital assets space, political and financial news will likely play a bigger role in influencing digital asset prices as more people begin to hedge into crypto to protect their value from the uncertainty presented by traditional systems.
There appears to be less and less of a correlation between cryptocurrency markets and equities markets over time however, as analysts have observed. This is likely due to a sharp drop in digital asset market volatility as the speculative traders that once thronged crypto trading portals have all but disappeared.
Crypto/Stock market correlation is down in 2019. Cryptocurrency markets have been taking their cues from the news coming out of Asia since the US government shutdown in January and appear to be dancing less to the S&P 500 Index’s tune of late. So to answer the question of whether or not there is a correlation between the traditional stock market and cryptocurrencies, the short answer is yes, no…sometimes. It seems to depend mostly on market sentiment and market correlations tend to be higher over the short term than the long term.