Bitcoin's price movements have long exhibited a unique dynamic compared to traditional financial markets, driven by two distinct narratives. On one hand, it is often viewed as a risk asset, performing in tandem with U.S. equities during periods of high market sentiment and increased risk appetite. This alignment is primarily due to growing institutional participation, which has made Bitcoin's capital flow patterns resemble those of other high-risk assets. On the other hand, during market panics or risk events, Bitcoin is frequently perceived as a safe-haven asset, decoupling from U.S. stock trends and sometimes even showing a negative correlation, especially when investor confidence in the traditional financial system wanes.
This dual narrative complicates Bitcoin's role, positioning it as both a risk-on and a potential safe-haven asset. The question of which narrative dominates becomes particularly relevant in the current geopolitical and economic climate.
Examining the Price Correlation
According to data from TradingView, the correlation between Bitcoin and the S&P 500 over the past decade stands at 0.17, which is lower than that of other alternative assets. For comparison, the S&P Goldman Sachs Commodity Index showed a correlation of 0.42 with the S&P 500 during the same period. Although Bitcoin has historically had a low correlation with equities, this relationship has strengthened in recent years, with the five-year correlation rising to 0.41.
However, Bitcoin's high volatility makes correlation data less stable over short periods. For instance, the correlation between Bitcoin and the S&P 500 was -0.76 around the time of the FTX incident in November 2023, but it shifted to a positive 0.57 by January 2024.
In contrast, the S&P 500 has demonstrated relative stability, with average annual returns of approximately 9% to 10%, serving as a benchmark for the U.S. economy. While its overall returns may be lower than Bitcoin's, the S&P 500 offers lower volatility and greater predictability.
A logarithmic comparison of Bitcoin and the Nasdaq Index reveals that both assets often show strong correlation during major macroeconomic events. For example, both experienced significant upward trends during the market recovery following the COVID-19 pandemic in 2020, likely reflecting increased demand for risk assets in an environment of accommodative monetary policy.
Yet, there are periods, such as 2022, when the trajectories of Bitcoin and the Nasdaq diverged significantly, indicating weakened correlation. This was especially evident during crypto-specific black swan events, which caused sharp, isolated declines in Bitcoin's price.
While Bitcoin has periodically delivered substantially higher returns than the Nasdaq, the data suggests a growing correlation between the two assets over time.
Bitcoin as a Potential Hedge
A report from WisdomTree highlights an intriguing perspective: although the absolute correlation between Bitcoin and U.S. stocks is not particularly high, recently, this correlation has been lower than that between the S&P 500 and U.S. Treasury returns.
Globally, trillions of dollars in assets are benchmarked or seek to track the S&P 500, making it one of the most closely watched indices worldwide. An asset that exhibited a stable -1.0 (perfect negative) correlation with the S&P 500 would be highly sought after, as it would potentially provide positive returns when the index performs poorly, embodying true safe-haven characteristics.
While stocks are generally considered risk assets, U.S. Treasuries are often viewed as closer to "risk-free" assets. Although the U.S. government can theoretically print money to meet its obligations, longer-term Treasuries can still experience market value fluctuations. A key discussion point in 2024 is that the correlation coefficient between the S&P 500 and U.S. Treasuries is approaching 1.0 (perfect positive correlation), meaning both asset classes may rise or fall simultaneously.
This simultaneous movement contradicts the traditional purpose of hedging. This phenomenon echoes 2022, when both stocks and bonds recorded negative returns, defying investor expectations for diversification.
Bitcoin currently does not show a strong hedging capability against S&P 500 returns. Data indicates its correlation with the index is not significant. However, recently, the return correlation between Bitcoin and the S&P 500 has been lower than that between the S&P 500 and U.S. Treasuries. If this trend continues, Bitcoin could attract more attention from asset allocators and investors, gradually becoming a more attractive portfolio tool.
From this viewpoint, compared to the traditional risk-free asset, Bitcoin only needs to be the "faster" hedging option, and investors may naturally begin to incorporate it into their portfolios.
The Growing Influence of Institutional Holdings
The role of institutional investors in the Bitcoin market is becoming increasingly important. The current distribution of Bitcoin holdings shows a significant increase in institutional influence, a trend that may further strengthen the correlation between Bitcoin and U.S. stock movements.
Data indicates that 19.9 million Bitcoin have been mined out of a total cap of 21 million, leaving 1.1 million yet to be issued. Among the mined supply, the top 1,000 dormant addresses holding coins for over five years account for 9.15% of the supply, roughly 1.82 million BTC. These coins typically do not enter the circulating supply, effectively reducing market liquidity.
Furthermore, according to Coingecko, the top 20 publicly traded companies, including MicroStrategy, hold 2.63% of the supply, approximately 520,000 BTC. MicroStrategy alone holds 2.12% of the total supply, about 440,000 BTC.
On another front, data from The Block shows that, as of this writing, all ETFs collectively hold 1.17 million BTC.
Assuming the holdings of dormant addresses, unmined coins, and corporate treasuries remain constant, the theoretical circulating supply is calculated as: 19.9M - 1.82M - 0.52M = 17.56 million BTC.
This means ETF institutions currently control approximately 6.67% of the circulating Bitcoin supply, a figure likely to grow as more institutions enter the space. From last year to now, the share held on exchanges has significantly decreased, while the ETF-held portion has expanded.
Similar to traditional equity markets, as institutional investors increase their market share, their investment decisions—such as buying or selling—play a more critical role in price volatility. This concentration of ownership can make Bitcoin's price movements more susceptible to the prevailing sentiment in the U.S. stock market, particularly during macroeconomically-driven capital flows.
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The Impact of U.S. Policy and "Americanization"
U.S. policy is exerting a growing influence on the Bitcoin market. This remains a significant unknown. Based on the current political landscape, if crypto-friendly appointees assume key regulatory and decision-making roles, such as advocating for a more relaxed regulatory environment or approving additional Bitcoin-related financial products, Bitcoin adoption could accelerate substantially. This deeper integration would not only solidify Bitcoin's status as a mainstream asset but could also further strengthen its correlation with U.S. stocks, both of which are increasingly reflective of U.S. economic trends.
In summary, the correlation between Bitcoin and U.S. equities is strengthening. The primary drivers include their shared reaction to macroeconomic events, the significant impact of growing institutional holdings, and the potential influence of U.S. policy direction. From this perspective, monitoring the trends in U.S. stocks may indeed provide valuable insights for forecasting Bitcoin's price movements.
Frequently Asked Questions
What is the correlation between Bitcoin and the S&P 500?
Historically, the long-term correlation has been relatively low but has increased in recent years. Over the past decade, it averaged 0.17, but over the last five years, it rose to 0.41. This correlation is not stable and can fluctuate significantly over short periods based on market events.
Why is Bitcoin sometimes considered a risk asset and other times a safe haven?
Bitcoin's perceived role shifts with market conditions. During periods of optimism and high risk appetite, it behaves like a risk asset, moving with stocks. During crises or when confidence in traditional finance wanes, investors may flock to it as a digital safe haven, causing it to decouple or move inversely to equities.
How are institutional investors affecting the Bitcoin market?
Institutional investors, particularly through ETFs and corporate treasuries, are controlling an increasing share of the circulating Bitcoin supply. This growing involvement makes Bitcoin's price more sensitive to institutional capital flows and overall sentiment in traditional financial markets, similar to how stocks are traded.
Could U.S. government policy really influence Bitcoin's price?
Yes. Regulatory decisions, such as the approval of ETFs or the establishment of clear crypto frameworks, significantly impact investor confidence and adoption. Policies that foster a friendly environment can drive institutional investment and strengthen Bitcoin's correlation with other U.S.-centric assets.
Is Bitcoin a good hedge against stock market downturns?
The data is mixed. While it has not consistently acted as a hedge (a negatively correlated asset), its recent correlation with the S&P 500 has been lower than that between stocks and U.S. Treasuries. This evolving dynamic is making it a more compelling option for some investors seeking portfolio diversification.
What percentage of Bitcoin is held by ETFs?
Currently, Bitcoin ETFs hold approximately 1.17 million BTC. Based on estimates of the circulating supply, this represents roughly 6.67% of all Bitcoin available for trading, a significant and growing concentration of institutional ownership.