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BTC as source of diversification
is known for its extreme volatility, with significant price swings like a roller-coaster ride — plunging over 64% in 2022 and then rallying 160% in 2023. This volatility can be challenging for crypto traders.
On the other hand, the S&P 500 offers more stable performance, averaging 9% to 10% annual returns and serving as a benchmark for the U.S. economy. Despite lower returns compared to Bitcoin, the S&P 500’s consistency and reliability make it a favored choice for risk-averse investors seeking predictable investment outcomes.
Allocations to cryptocurrency can diversify risk and enhance returns in traditional portfolios, according to Glassnode.
For example, adding small allocations to the Coinbase (NASDAQ:) Core Index (COINCORE), a market-cap weighted crypto index primarily composed of Bitcoin (70.9%) and Ether (21.9%), to a 60/40 portfolio (60% MSCI ACWI and 40% U.S. Agg) increased both absolute and risk-adjusted returns over a five-year period ending March 31, 2024.
Strong Q1 performance
Bitcoin (BTC) had an impressive first quarter in 2024, posting a 69% return and outperforming most traditional asset classes, according to Coinbase and Glassnode joint report.
Despite the launch of BTC ETFs, which many thought would lead to a stronger correlation with traditional finance assets, BTC displayed minimal correlation with major asset classes, using data from a recent Glassnode and Coinbase Institutional report. This suggests its potential as a valuable component for diversification within a portfolio.
Bitcoin negatively correlated with the DXY index and gold, while its correlation with the S&P 500 was low at 0.11. This suggests that Bitcoin’s price movements are largely independent of traditional markets.
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However, at the start of Q2, BTC is down 15% from its highs, coinciding with the DXY index rising above 106, further highlighting the negative correlation between the two.
The Q2 report also noted a decrease in Bitcoin’s volatility since January 2020, with peaks becoming less pronounced. Although volatility currently sits just under 60%, the report emphasizes a long-term downward trajectory despite occasional spikes above the trendline, mainly during 2020 and 2021.
As Bitcoin continues to mature into a major asset class, its volatility is expected to continue to decline over time.
Why stock market matters
According to Tastylive research, generally, there is little correlation between Bitcoin and the S&P 500, except during significant price movements of Bitcoin (+5% or more to the upside, or less than -5% to the downside).
When Bitcoin’s price movement exceeds 5%:
- Average change of the S&P 500: 0.42%.
- Median change of S&P 500: 0.19%.
- Standard deviation: 1.53%.
- Average change of the S&P 500: -0.67%.
- Median change of S&P 500: -0.34%.
- Standard deviation: 2.31%.
- Average change of the S&P 500: 0.09%.
- Median change of S&P 500: 0.11%.
- Standard deviation: 1.11%.
This created a favorable environment for risk-on trading, leading to bull rallies for both Bitcoin and the S&P 500 index despite the bearish sentiment following the 2022 correction.
As Bitcoin’s correlation with traditional equity markets like the S&P 500 and Nasdaq increases while its correlation with gold decreases, it suggests that Bitcoin is behaving more like a risk-on asset rather than a safe haven.
When investors are feeling adventurous, they often gravitate toward stocks and digital coins for the potential of higher profits.
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The increasing involvement of institutional and retail investors in both equity and cryptocurrency markets could lead to simultaneous buy and sell decisions, aligning the price movements of these assets.
