Bitcoin could lose its diversification status as correlation with stocks increases

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• Bitcoin's price has shown a rising correlation with the stock market in the past year following similar reactions to macroeconomic data.

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• The launch of Bitcoin ETFs may have played a major role in the rising positive correlation.

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• Bitcoin risks losing its status as a safe haven and diversification asset if the stock market correlation persists.

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Bitcoin's (BTC) rising correlation with the traditional stock market is gradually affecting its role as a portfolio diversifier. This trend has been visible following Bitcoin's similar reactions to the S&P 500 upon macroeconomic data releases.

Bitcoin's similarity with stocks could affect its status as a safe haven

Bitcoin risks losing its status as a diversification asset after showing strong correlations with the stock market in the past eight months.

Historically, Bitcoin has been treated as a distinct asset due to its distinction with traditional assets in the stock market. This characteristic strengthened its appeal as a safe haven during economic uncertainty. 

However, this trend has shifted in the past year as several events led to a rising correlation between Bitcoin and the stock market.

For example, the substantial downturn triggered by the unwinding of the Japanese Yen carry trade in August when the Bank of Japan raised interest rates caused significant volatility across the crypto and stock markets, with Bitcoin and the S&P 500 crashing by about 25% and 6%, respectively.

During an interview with Bloomberg, VanEck CEO Jan Van Eck expressed his displeasure with this growing connection. 

"To me, the disappointing thing is that Bitcoin has had a high correlation with the Nasdaq over the last six months," he said. "If you look at the ten-year correlations are almost zero, which is really what diversification should be."

Crypto and stock reaction to Trump's victory and recent NFP data

The massive optimism that followed Donald Trump's election victory stirred a rally in both markets as Bitcoin and the S&P 500 established new all-time highs.

Likewise, the market crash in December following the Federal Reserve's (Fed) hawkish outlook for 2025 sparked huge fears across the crypto and stock markets.

Further similarities include the release of the Nonfarm Payrolls (NFP) data last week and the Federal Reserve's commentary on their 2025 outlook. This caused a market-wide sell-off in both the stock and crypto markets, with losses running into billions.

These events showcased a growing relationship between the once distinct asset classes.

Bitcoin ETFs could partly be responsible for rising correlation with stocks

One of the key drivers of this rising correlation is the introduction of traditional stock market players into the crypto market through Bitcoin ETFs. This new class of investors seems to be applying the same principles that guide their stock investing practices to how they treat their Bitcoin holdings.

The trend is visible in the flows across crypto ETFs during these macroeconomic data releases. Although other key factors could be at play, Bitcoin ETFs seem to be one of the potential causes for the similarities with stocks.

This similarity could accelerate if more crypto ETFs debut on Wall Street and, in turn, hamper Bitcoin's position as a diversification asset among investors.

Another key trend this developing dynamics with stocks could affect is the traditional four-year crypto market cycle, which is expected to spur Bitcoin to new highs in 2025.

In contrast to Bitcoin's growing correlation with equities, other asset classes, such as gold and the US Dollar Index (DXY) have experienced opposite reactions during the events highlighted earlier.