Bitcoin and Stocks Have More in Common Than You Think: Gadfly

LONDON (Capital Markets in Africa) – Bitcoin has been a plaything for risk-hungry traders and punters rather than a widely held investment or real-world currency. It’s been shunned by banks and banned by governments.

Yet it’s still possible that its slide on Monday made the broader market selloff worse, as investors sold assets to compensate for crypto-losses. Marginal as this may be, and you can’t be certain of correlation with something as unstable as digital currencies, it’s a link that’s at least worth exploring.

The past 24 hours have shown a surprising resemblance between Bitcoin’s behavior and the world’s more established financial markets. A chart of Bitcoin’s price plotted against S&P 500 E-Mini futures shows how both moved in similar formation when the selloff reached a trough and a mini-rebound began.

The corrections are similar, with both back to levels last seen in November. A regression analysis of the past two years shows a correlation of 0.7 between Bitcoin’s price and the S&P 500 Index, where 0 is the weakest correlation and 1 the strongest. Over a year, the correlation is 0.8.

This is pretty unexpected, considering that Bitcoin is essentially just a piece of code.

But we shouldn’t ignore its place in investor portfolios and psychology. It may not be a traditional Wall Street holding, but the digital currency did become a real-world financial fixture at the end of last year when futures contracts began trading — the same time that it hit a record price of almost $20,000.

Institutions were given more options to buy into the bubble, and the Bitcoin Investment Trust vehicle saw its premium to net asset value swell to more than 50 percent. Hedge-fund managers reinvented themselves as crypto-experts. Brokers kept clients updated on Bitcoin as if it were oil, gold or the euro.

So rather than believe that a Bitcoin can fall in the proverbial forest with nobody around to hear it, the crashing sound may well have reverberated elsewhere. Losses in crypto-focused corners of portfolios, as Bitcoin slid from about $12,000 to below $8,000 in the space of a week, probably led to sales of other assets to compensate, reckons one senior trader.

Again, this is all pretty murky territory given the rampant speculation around Bitcoin. But it certainly isn’t looking like much of a hedge against the traditional financial markets.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Source: Bloomberg Business News