Bitcoin And Stocks Rally Despite Declining Correlation

Sure, it was loosely correlated for a while there, but by now, bitcoin and the crypto markets are once again able to claim independence from the traditional markets.

In short, and even though measuring correlation can be quite complex, I think this graph pretty much sums it up.

Bitcoin and digital assets rate different than traditional market.

What we’re seeing here is the 90-day Pearson correlation between bitcoin and the S&P 500 since 2011. We can clearly see earlier this year, where the correlation spiked up to 0.6 due to the multi-asset early-pandemic sell-off.

By now, however, we’re once again below 0.2, which basically means that there is no correlation on a day-to-day basis anymore.

It should probably be noted that even the peak of 0.6 only represents a loose correlation. Many stocks have a very high correlation with each other, usually above 0.8 even if they’re in completely different industries, and many altcoins are similar.

What does this mean?

The graph above represents extremely short-term data, the 360-day correlation never even reached 0.4. However, as far as fundamentals go, I do believe that the key drivers of stocks and digital assets are extremely similar, as they have always been.

This is something that we’ve covered extensively in the BMJ newsletter. During periods when the Fed prints money, it sends prices upward in all markets.

Portfolio managers, particularly those who have large amounts of assets under management, have a tendency to diversify their holdings. The practice of correlation diversification is a way of reducing risk, even in risky markets, by building a portfolio utilizing different asset classes.

Key takeaways

Now, with the bond markets in trouble and yields sinking to levels so incredibly low that it’s hardly attractive for investors to hold them long-term, my guess is that portfolio managers are actively looking for other ways to achieve diversification.

This is why gold and silver have been off the hook lately. The concept of TINA (there is no alternative) has been driving traders to stocks all year long, and I’m pretty certain it’s time for a change, especially when there is a perfectly viable alternative sitting in plain sight.

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