Bitcoin‘s notorious volatility has been a defining characteristic, showcasing dramatic price swings reminiscent of a roller-coaster ride. From a staggering 64% plunge in 2022 to a remarkable 160% rally in 2023, the cryptocurrency landscape has posed challenges for traders navigating its unpredictable terrain.
In contrast, the S&P 500 index offers a steadier performance, delivering consistent annual returns averaging between 9% to 10%. Serving as a benchmark for the U.S. economy, the S&P 500’s reliability appeals to risk-averse investors seeking stability and predictable investment outcomes.
Glassnode, a leading crypto analytics firm, suggests that incorporating allocations to cryptocurrency can diversify risk and enhance returns within traditional portfolios. For instance, a study conducted on the Coinbase Core Index (COINCORE), predominantly comprising Bitcoin and Ether, revealed increased absolute and risk-adjusted returns when integrated into a 60/40 portfolio (60% MSCI ACWI and 40% U.S. Agg) over a five-year period ending March 31, 2024.
Bitcoin’s robust performance in the first quarter of 2024, boasting a remarkable 69% return, outpaced most traditional asset classes, as reported by Coinbase and Glassnode. Despite the introduction of Bitcoin ETFs, which some anticipated would strengthen its correlation with traditional financial assets, data from Glassnode and Coinbase Institutional indicates minimal correlation with major asset classes. This independence underscores Bitcoin’s potential as a diversification tool within portfolios.
The correlation between Bitcoin and traditional market indices is a topic of interest. While Bitcoin exhibits a negative correlation with the DXY index and gold, its correlation with the S&P 500 remains modest at 0.11. This suggests that Bitcoin’s price movements largely operate independently of traditional markets.
However, the onset of the second quarter saw Bitcoin retract 15% from its highs, coinciding with the DXY index surpassing 106. This development underscores the negative correlation between Bitcoin and traditional indices, highlighting Bitcoin’s divergence during market fluctuations.
Noteworthy is the observed decrease in Bitcoin’s volatility since January 2020, with peaks becoming less pronounced over time. Although current volatility hovers just below 60%, the long-term trend indicates a gradual decline, notwithstanding intermittent spikes.
The evolving relationship between Bitcoin and the S&P 500 warrants attention. When Bitcoin experiences significant price fluctuations exceeding 5%, it tends to influence the S&P 500’s movement. During such periods, both the average and median changes in the S&P 500 demonstrate notable deviations, indicative of heightened market sensitivity to Bitcoin’s fluctuations.
As Bitcoin’s correlation with traditional equity markets intensifies and its association with gold diminishes, it assumes the characteristics of a risk-on asset rather than a safe haven. The influx of institutional and retail investors into both equity and cryptocurrency markets could synchronize buy and sell decisions, aligning price movements across these assets. This convergence underscores the growing interconnectedness between traditional and digital financial ecosystems.
