The correlation between bitcoin and the S&P 500 index appears to be diminishing, signaling a potential decoupling of these two assets. This observation comes from Dan Morehead, founder and managing partner at Pantera Capital.
Historically, cryptocurrencies like bitcoin have shown little correlation with U.S. stocks. For the first nine years of bitcoin’s existence, the correlation with the S&P 500 was a mere 0.03. However, in 2020, this correlation began to increase, reaching a peak of 0.76 in May of that year.
One contributing factor to this shift was the growing involvement of “excessively-leveraged centralized entities,” according to Morehead.
The decline in correlation between bitcoin and stocks is seen as a positive development for crypto assets. Morehead highlights the appeal of discovering an asset class with significant historical returns and minimal correlation to traditional assets.
Morehead also points out that blockchain, the underlying technology behind bitcoin, is not tied to interest rates. This lack of connection to mainstream asset classes, such as stocks, bonds, and real estate, adds to its distinctive appeal.
This year, bitcoin has experienced an impressive rally, with an 80% increase in value. This follows a decline of over 60% last year. In contrast, the S&P 500 has posted a 15% gain year-to-date but suffered an 18% loss in 2022.
As the relationship between bitcoin and stocks evolves, investors are keeping a close eye on these two markets and the potential opportunities they present.