Since the beginning of 2022, the correlation between Bitcoin and the S&P 500 appears to have strengthened as cryptocurrency adoption increases. This suggests that the largest cryptocurrency by market cap is more of a risky asset. Since the start of 2020, Bitcoin and the S&P 500 have returned 495% and 49%, respectively.
Liz Ann Sonders, chief investment officer at Charles Schwab, said:
“In fact, the 20-day rolling correlation between Bitcoin and the S&P 500 broke above 0.7. This is the highest level since October 2020.”
The International Monetary Fund (IMF) noted that before the outbreak, bitcoin and the second-largest digital currency, ethereum, had little correlation with major stock indexes. But that changed after the Federal Reserve and other central banks responded with an unprecedented monetary response to the pandemic. The IMF stated:
“Cryptocurrency prices and U.S. equities have both surged on the back of looser global financial conditions and heightened investor risk appetite.”
According to Lennard Neo, research director at Stack Funds, Bitcoin has “behaved more like a risk asset lately amid market uncertainty.” He added:
“If Bitcoin is an inflation hedge or a risk asset, the market remains divided and in the current macro environment, expect more volatility in the near term.”
The IMF said bitcoin’s volatility could explain about one-sixth of the S&P 500’s volatility during the pandemic, and about one-tenth of the S&P 500’s returns. Therefore, a drop in the price of Bitcoin would increase investor disgust, leading to a drop in the stock market.
In addition, according to IMF data, the spillover effect of stablecoin Tether on global stock markets has increased during the new crown, but it is still smaller than Bitcoin. This could explain the 4% to 7% change in U.S. stock market returns and volatility.
Who is entering the digital asset market?
The use of cryptocurrencies and blockchain technology is increasing in developing countries. For example, the Turkish lira has depreciated sharply against the dollar against the backdrop of soaring inflation. Turkey appears to be ditching fiat currencies in favor of digital assets. As the average daily trading volume of cryptocurrencies using the lira climbed to nearly $2 billion. Additionally, Mexico and Jamaica are testing central bank digital currencies (CBDCs), and Nigeria launched a CBDC last year.
Of course, El Salvador was the first country to turn bitcoin into legal tender. It has been involved in cryptocurrencies in various ways, including buying and holding bitcoin.