Introduction
Bitcoin’s correlation with US equity markets has fallen to its lowest level in over a year and a half, according to crypto analytics firm CoinMetrics. The 30-day pearson correlation between Bitcoin and the S&P 500 has dropped below 0.20, indicating a shift in the relationship between Bitcoin and traditional markets.
This could have important implications for investors and traders who use Bitcoin as a hedge against traditional market volatility.
The Data
CoinMetrics presents a chart showing the decline in Bitcoin’s correlation with the S&P 500 over the past year. The correlation reached its lowest level in September 2021, when it was around 0.10. Since then, the correlation has been steadily increasing until it reached around 0.50 in January 2022.
However, in recent weeks, the correlation has once again fallen sharply, dropping below 0.20. This is the lowest level since September 2021, indicating a significant shift in the relationship between Bitcoin and traditional markets.
Possible Explanations
There are several possible explanations for why Bitcoin’s correlation with the S&P 500 has fallen to such a low level. One possibility is that investors are becoming more comfortable with Bitcoin as an asset class, and are no longer viewing it as a high-risk investment. This could be due to the increasing mainstream adoption of Bitcoin and other cryptocurrencies, as well as the growing number of institutional investors entering the market.
Another possible explanation is that the recent volatility in traditional markets, particularly in response to the ongoing COVID-19 pandemic, has had less of an impact on the cryptocurrency market. Bitcoin may be decoupling from traditional markets, and becoming more of a standalone asset.
Implications for Investors
The falling correlation between Bitcoin and traditional markets could have important implications for investors who use Bitcoin as a hedge against market volatility. If Bitcoin is becoming less correlated with traditional markets, it may no longer be an effective hedge against market downturns.
On the other hand, if Bitcoin is becoming more of a standalone asset, it may offer unique diversification benefits to investors. By including Bitcoin in a diversified portfolio, investors may be able to reduce their overall portfolio risk and potentially enhance returns.
Conclusion
Bitcoin’s correlation with US equity markets has fallen to its lowest level in over a year and a half, according to CoinMetrics. This could signal a shift in the relationship between Bitcoin and traditional markets, with Bitcoin becoming more of a standalone asset.
Investors and traders should take note of this development and consider how it may impact their investment strategies going forward. While Bitcoin may no longer be an effective hedge against market volatility, it may offer unique diversification benefits to investors seeking to reduce portfolio risk.
