Years ago, investors started looking to Bitcoin and other cryptocurrencies to add to their portfolios as a way to diversify their investments in traditional stocks and other more common investment tools. Economist Yale Aleh Tsyvinski has conducted extensive research into how Bitcoin can benefit investors in terms of precisely diversification and stated that an ideal portfolio design should be at least 6%. BTC, even if it will only be used for diversification purposes.
Bitcoin and the exchange
For most of Bitcoin’s existence, the diversification trend continued as Bitcoin and other cryptocurrency assets showed a strong anti-correlation with the stock exchange. The sample chart below, taken just a year ago, shows a striking anti-correlation.
Suddenly, however, these two asset classes became closely correlated throughout 2020. The correlation began as the stock market dragged Bitcoin and the rest of the cryptocurrencies down on Black Thursday in March.
Now the correlation has reached its all-time high. Everything the investment world knew about Bitcoin acting as a diversification tool in stock abundant portfolios may now stop working. It also means that Bitcoin could become much more unpredictable in the days ahead as it will respond to the tension the stock market is experiencing as a result of the economic contraction caused by the pandemic.
PrimeXBT analysts analyze what to expect and how to prepare for whatever moves Bitcoin and the exchange will take in the future.
Bitcoin’s correlation with the S&P 500 has hit an all-time high
According to the data, the correlation between the Bitcoin price and the S&P 500 stock index in the US has reached an all-time high.
In the chart below, Bitcoin and the S&P 500 had an anti-correlation as low as -0.15 correlation. Only that from the beginning of 2020, both assets have become strongly correlated, reaching a correlation of +0.35.
These two completely different assets began to correlate just before Black Thursday in mid-March.
This collapse crushed the stock market and caused Bitcoin to drop by more than 50%. The rest of the profits in the cryptocurrency market for the year were also netted off.
However, since then, almost every high and low fit almost perfectly. The price chart below clearly shows how closely these two assets are correlated, almost every day.
What does this mean for Bitcoin? The first-ever cryptocurrency is expected to eventually hit $ 500,000 or more. The recent halving of May 2020 is said to have acted as a catalyst for the new boom, but the pandemic had other plans for Bitcoin.
Will the new spike in COVID cases cause another significant cryptocurrency crash due to an ongoing peak correlation with the stock market, or will these assets break out and hit high price forecaststhat analysts expect?
Economist warns against decline
The world is trying to restore some normalcy after months in quarantine to prevent the virus epidemic from spreading further.
Between the downturns and the economic stimulus, the stock market revived almost entirely. Except that the pandemic is getting out of control in the United States again and it could cause another major crash.
The situation reminds economist A. Gary Shilling of the one in 1929, when investors were convinced that the bear market was over and that another crash surprised them.
The result was an even deeper decline. According to the analyst, another similar decline would not only lower the S&P 500 index by another 40%, but could also lower the level of the Bitcoin rate.
The leading cryptocurrency in terms of market capitalization did not break the previous high of February 2020. The fall on Black Thursday to $ 3,800 was the lower lows. Another lower low is possible, which will bring Bitcoin back into a downtrend.
If this happens, the new bubble will be even more delayed. This theory is supported by the fact that market timekeepers such as the late W.D. Gann, they talked about 90-year cycles in the financial markets.
According to Gann’s theory, markets experience a similar decline approximately every 90 years. 2020 marks around 90 years after the stock market crash of 1929, which was warned by an economist.
Low volatility could be the key to Bitcoin’s boom
2020 was a catastrophe for the global economy and the mainstream financial market. Major stock indices such as the S&P 500 hit historic highs in February to close the first quarter with the worst recorded losses.
After the historic falls, record rallies followed. The volatility in traditional stock markets is more like cryptocurrencies.
However, cryptocurrency assets like Bitcoin have been unusually stable. Volatility against the Nasdaq Composite Index, another US stock market index, is at its lowest level ever.
The last time volatility hit such low levels against the stock market index, it marked the beginning of the previous Bitcoin boom.
In the past, with the halving behind us, a new boom was coming. The pandemic may have acted as a roadblock, but the muted momentum could be unleashed in the days ahead.
However, for that to happen, Bitcoin and the S&P 500 must become anti-correlated again – something that has not been seen since early 2020.
Get ready for record volatility to return to the market with PrimeXBT
Bitcoin’s volatility rarely remains so low, and when relative stability finally ends, expect fireworks in the crypto asset class.
The situation will be even more explosive if the stock market crashes again amid negative financial performance reports later this month. This could cause a return to record volatility in traditional markets.
Alternatively, if the anti-correlated relationship between BTCUSD and the S&P 500 returns, Bitcoin may experience a major breakthrough and enter a new uptrend.
If or when volatility increases, traders on PrimeXBT can profit from any direction of the market, with long and short positions.
PrimeXBT offers cryptocurrency assets like Bitcoin and Ethereum alongside traditional markets like stock indices, forex, and commodities. Both major US stock indices, the S&P 500 and the Nasdaq, are included alongside gold, oil and more.
Built-in tools technical analysis they can help traders prepare for any anomalies, stop losses and profit orders to ensure capital protection and not to miss any opportunities.
Sign up for PrimeXBT today to prepare for the upcoming explosions.