Bitcoin could lose its diversification status as correlation with stocks increases
- Bitcoin's price has shown a rising correlation with the stock market in the past year following similar reactions to macroeconomic data.
- The launch of Bitcoin ETFs may have played a major role in the rising positive correlation.
- Bitcoin risks losing its status as a safe haven and diversification asset if the stock market correlation persists.
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.
Crypto ETF FAQs
An Exchange-Traded Fund (ETF) is an investment vehicle or an index that tracks the price of an underlying asset. ETFs can not only track a single asset, but a group of assets and sectors. For example, a Bitcoin ETF tracks Bitcoin’s price. ETF is a tool used by investors to gain exposure to a certain asset.
Yes. The first Bitcoin futures ETF in the US was approved by the US Securities & Exchange Commission in October 2021. A total of seven Bitcoin futures ETFs have been approved, with more than 20 still waiting for the regulator’s permission. The SEC says that the cryptocurrency industry is new and subject to manipulation, which is why it has been delaying crypto-related futures ETFs for the last few years.
Yes. The SEC approved in January 2024 the listing and trading of several Bitcoin spot Exchange-Traded Funds, opening the door to institutional capital and mainstream investors to trade the main crypto currency. The decision was hailed by the industry as a game changer.
The main advantage of crypto ETFs is the possibility of gaining exposure to a cryptocurrency without ownership, reducing the risk and cost of holding the asset. Other pros are a lower learning curve and higher security for investors since ETFs take charge of securing the underlying asset holdings. As for the main drawbacks, the main one is that as an investor you can’t have direct ownership of the asset, or, as they say in crypto, “not your keys, not your coins.” Other disadvantages are higher costs associated with holding crypto since ETFs charge fees for active management. Finally, even though investing in ETFs reduces the risk of holding an asset, price swings in the underlying cryptocurrency are likely to be reflected in the investment vehicle too.
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