Bitcoin Price Unfazed as It Correlates with the U.S. Stock Market
Bitcoin price remains bid while above the $10,000 level, albeit it shows some signs of weakness. The weakness comes from the series of lower highs it posted recently. However, Bitcoin moves hand in hand with the U.S. stock market, making it vulnerable to losing its status.
What does it mean?
Many investors look at Bitcoin as a new form of money. That is, if they can define the intrinsic value of Bitcoin. The problem is that people bought into Bitcoin waiting for it to offer the safe-haven status or the alternative investment many looked after. But, as the current crisis showed us, the only safe-haven asset turned out to be the U.S. dollar.
When the DXY dropped, the Bitcoin price moved higher. Or, when the USD strengthened, Bitcoin moved lower.
Positive Correlation Between the S&P500 and Bitcoin Price
Even more interestingly, there is a direct, positive correlation between the stock market and Bitcoin. The correlation rule states that in a portfolio, one should not add a new asset if the correlation exceeds 0.5% (in a positive correlation) or -0.5% (in a negative correlation). This way, the diversification benefit can be obtained.
However, as the chart below shows, adding Bitcoin to a portfolio consisting of the S&P500 (i.e., the market) brings no benefits. There is no diversification whatsoever – only an increase in risk.
Many investors believe that Bitcoin’s market capitalization will reach trillion of dollars into the next decade. Currently, Bitcoin’s cap sits around $200 billion, just so you have an order of magnitude for a meaningful comparison.
If such a forecast is correct, the positive correlation with the stock market must end. Or, if not, the stock market will explode higher too. And the USD with it.
But if that is the case, do not expect things to go there overnight. Bitcoin did have its run to almost 20k in 2017, but that was before the current coupling to exist.
If Bitcoin price moves with the dollar and the market, central banks will act just enough to slow down the process.