Courtesy of Lorenzo Cafaro
This research was sponsored by Luno Global, a platform that allows users to buy, save and manage cryptocurrencies.
Investors evaluate markets by examining their past performance in an effort to get a better sense of what they might do going forward. As bitcoin and other cryptocurrencies are newer assets, there is less market history to study. Thus, there is currently no consensus as to how, exactly, bitcoin and other cryptocurrencies should be classified.
One point of view is that bitcoin is digital gold. Gold has historically been viewed as an inflation hedge, as well as a safe-haven asset during times of economic or market turmoil. In other words, investors with extra cash on hand would tend to panic sell stocks and other assets considered “risk-on” assets and buy gold, which is considered a “risk-off” asset. If market participants perceived bitcoin that way, the digital currency would draw inflows when the stock market was dropping.
The other view is that bitcoin itself is a volatile asset that is viewed as more “risk-on” than stocks, with high projected returns during times of strong economic conditions and a risk of steep crashes when the risk appetite of investors drops.
When looking at market history, analysts have noted that bitcoin is closely tied to other risk-on assets, such as stocks, and tech stocks in particular. However, as bitcoin has matured, it appears that there has been a gradual decoupling from the stock market, causing it to shift from a risk-on asset to one not correlated with the stock market.
Does this mean that bitcoin is on a track to become digital gold?
We analyzed the digital currency through several different lenses:
Bitcoin vs. Nasdaq Composite
The Nasdaq composite is one of the most prominent American stock indexes, and its value is based primarily on the share prices of tech companies. Some of its larger components include Apple Inc., Microsoft Corporation, Tesla, Inc., Facebook, Inc., Netflix, Inc. and Intel Corporation.
At some points, analysts have observed that its fluctuations were highly correlated with those of bitcoin, which may not be very surprising. It sounds reasonable that investors in innovative technology companies would be likely to invest in an asset class like cryptocurrency.
2020
For most of 2020, bitcoin and the Nasdaq moved in very close unison. In fact, observing the values depicted on the chart below, which we got from TradingView, these two followed each other almost in tandem between Jan. 25 and Oct. 20.
Looking at the crash at the beginning of COVID-19, several markets, including those for stocks and digital assets, started to decline in late February. On March 12, Bitcoin suffered its largest drop with a daily close under $4,900. Almost in unison, the Nasdaq also crashed and had a value of less than 7,000 between March 11 to April 12.
When Bitcoin began a sustained strong bull run around Oct. 20, it was trading close to $11,000, and the Nasdaq had a value of close to 11,000. Bitcoin completely took off, leaving the Nasdaq’s valuation in the dust.
Bitcoin subsequently rose to $63,000 on April 13, then declined to $29,000 on July 20, an approximately 54% decline.
While Bitcoin experienced this brutal correction, the Nasdaq went up during the same time frame. On April 13, the index was valued at 13,996, and on July 20, it was at 14,498, an increase of 3.5%.
Sept. 13 — Oct. 12
Looking at BTC vs. Nasdaq over a shorter period, there is a similar short term variance showing how these have become uncoupled.
On Sept. 13, the Nasdaq stood at 15,105. It ended Oct. 12 at 14,465, down 4.2% during this period.
During the same time frame, bitcoin went from $45,005 to $56,007, a gain of 21.4%.
Bitcoin vs. S&P 500
Let us take a look from another view. The S&P 500 is an index containing the stocks of 500 of the largest publicly-traded companies on the U.S. market. It is considered a broader measure of U.S. stock market strength than the Nasdaq, making it slightly less “risky” than the smaller tech-heavy composite. We also compared bitcoin to the S&P 500.
At the onset of the COVID-19 pandemic, in 2020, it can be seen that there was a tight correlation between bitcoin and the S&P 500. Both bitcoin and the index rose and fell with investor sentiment and climbed together at the beginning of the recovery in March through May.
Source: Investing.com
However, moving ahead into 2021, they show a recent decoupling. Looking at immediate figures, from the beginning of September into October, the S&P 500 declined by nearly 5% while bitcoin increased over 10%.
A Look Ahead
Both 2020 and 2021 have been unprecedented years for global markets in some ways, but not in others. Significant shifts in macroeconomic trends, including lockdowns, increased remote work and social media interaction, have all influenced markets.
Other trends have included increased demand for energy, with reopening economies and gaps in supply chain infrastructure. Meanwhile, broader themes, such as increased pressure from investors to divest from fossil fuels and invest in cleaner energy sources such as solar and wind, along with U.S. lawmakers’ inability to approve a hoped-for infrastructure bill, have thus far created turbulence in the stock market.
How will bitcoin and cryptocurrencies react to this news? Bitcoin has been on a bit of a tear lately, recently passing $57,000, while the overall cryptocurrency market capitalization has grown to $2.3 trillion per CoinMarketCap data. And whichever direction they take in terms of price, bitcoin and other digital currencies are developing into their own distinct asset class as the crypto/blockchain space continues to mature.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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