Major financial markets have been under severe stress in recent weeks as traditional market stocks and cryptocurrencies saw months of decline in September. S&P 500, Dow Jones, and now Facebook (following its recent server outrage) were bleeding in the markets, and Bitcoin showed a similar picture.
However, the markets have entered the fourth quarter of 2021 and the biggest digital asset has once again taken over the recovery. While some of the traditional stocks are struggling to recover, Bitcoin, alongside Ethereum, has overcome its losses in September.
The diminishing correlation between traditional stocks and crypto has been debated several times over the past few years, and right now it’s less surprising to see how crypto alone performs, here’s why.
Fast market analogy between Bitcoin-SPX-Dow Jones
Since the beginning of September, the S&P 500 has lost 5.22% in value to date, while the Dow Jones is down 3.84%. Bitcoin has been on a similar path, but has made significant gains over the past week and broken the short-term downtrend. At press time, Bitcoin was up 6.19% since early September.
The rebound was reminiscent of the March 2020 period after the Black Swan event, when Bitcoin led every asset class in the market. It was seen as a revolutionary leap forward during the peak of Covid, but it’s no longer all that surprising.
While Bitcoin is still largely considered a risky asset, the declining correlation between Bitcoin and SPX has been developing for over a year. According to Skew, BTC-SPX shared an upward correlation of 50% as early as November 2020, which has fallen below 20% at the time of going to press.
Why did Bitcoin fall in the first place?
Due to the inherent volatility characteristics and weaker market capitalization of Bitcoin compared to other traditional top market values, the digital token is prone to sudden market changes. In addition, there have been several events in the past few weeks that disrupted the ecosystem.
It started with Evergrande’s debt situation, which affected all asset classes, but then Bitcoin was met with more negative sentiment due to the Chinese trade ban.
It is largely difficult to remain resilient to any macro activity as capital inflows / outflows between traditional markets and cryptocurrencies may be controlled by the same group of large investors. Basically, those who invest in SPX, DOW JONES, will also have smaller market positions in BTC.
However, the correlation could stiffen over the next few months as investors are currently expecting a green signal from the Bitcoin ETF. A nod from regulators for a Bitcoin ETF would allow a larger number of investors to put money into Bitcoin in a regulated manner. In short, it should come as no surprise that Bitcoin outperforms major stocks.