Apr 14, 2020 09:15 AM | Kyle Torpey

Bitcoin recently hit a new all-time high correlation with the S&P 500, a stock market index that tracks the performance of large US companies. This correlation raises questions about Bitcoin’s utility as a “digital gold,” namely an asset that is supposed to be uncorrelated with traditional markets.


As indicated by the above chart from Coin Metrics, the 90-day Pearson correlation coefficient for Bitcoin and the S&P 500 hit an all-time high of roughly 0.5 in the middle of March. A coefficient of 1 indicates perfect correlation, a coefficient of 0 means there is effectively no correlation, and a coefficient of -1 points to a perfectly inverse correlation.

To get a better understanding of what Bitcoin’s historically high correlation to major stocks means for the crypto asset, Longhash reached out to Blockchain Capital General Partner Spencer Bogart, Castle Island Ventures and Coin Metrics co-founder Nic Carter, and Delphi Digital co-founder Kevin Kelly.

What Happened to ‘Digital Gold?’

Although Bitcoin fell sharply in the aftermath of the World Health Organization’s classification of COVID-19 as a pandemic, the reality is that this shouldn’t have come as such a surprise. As we wrote last month, Bitcoin is a hedge against the collapse of the fiat currency system, not a general economic crisis.

“I’m not shocked that [the S&P 500 and Bitcoin] have been correlated recently, although I'll note that the mathematical BTC:SPY correlation has dropped since it shot up in mid-March,” said Nic Carter. “In a rush to liquidity, investors sell off assets with short maturity for long-maturity assets, to cover margin calls or mortgage payments, etc. Bitcoin tends to be among the least encumbered liquid assets and it's often not held in a tax advantaged way, so it makes sense that it would be first on the chopping block for many investors under stress.”

Spencer Bogart said that cross-asset correlations tend to rise across the board during a liquidity crunch, and in his view, that’s exactly what has happened over the course of the past month.

“During the worst of the market rout, everything was correlated as every liquid asset was sold into cash,” explained Bogart. “For example, during the worst of the market rout, there was no safe haven anywhere – even well-established safe haven assets like gold and US Treasuries sold off significantly. Given that Bitcoin is up YTD and outperforming nearly every major asset (except gold and Treasuries), I think its performance suggests that Bitcoin is progressing along its trajectory from a widely dismissed speculative asset toward a widely held global money and store of value.”

To Bogart’s point, a recent report from Delphi Digital covered the fact that Bitcoin has outperformed every other major asset class over the past twelve months.

“I don’t think Bitcoin’s initial sell-off is too concerning given the exceptional market conditions we’ve been facing,” said Kevin Kelly. “For example, gold lost 30% of its value between March and October of 2008 as stocks cratered.”

But isn’t Bitcoin supposed to be uncorrelated? 

Bogart and Kelly noted that long-term trends are more important than short-term correlations during an economic crisis.

“Given that most people invest for longer-term horizons, it’s really the longer-term correlations that matter most,” said Bogart. “That is, we want to see the benefits of diversification over the course of our holding period, not across every day/week/month within that holding period. So far, Bitcoin is still uncorrelated to most major assets over longer-term horizons.”

Kelly added that the recent correlation between Bitcoin and the S&P 500 is not enough to invalidate the uncorrelated asset thesis around Bitcoin.

“We just saw the most volatile period for stocks in decades with average daily price fluctuations between 3-5% for weeks,” said Kelly. “Very few asset classes escape the immense selling pressure that’s characteristic of a liquidity crisis, so it’s not a huge surprise BTC suffered a swift drawdown alongside risk assets. Historically, large spikes in market volatility have coincided with sizable sell-offs for bitcoin and crypto assets at large.”

According to Kelly, the lack of historical correlation between Bitcoin and traditional markets is primarily caused by the types of investors that have traditionally been active in the crypto market.

“If institutional investment in crypto rises, so too will correlations between BTC and other asset classes as sophisticated investors view and manage their positions in the context of a multi-asset portfolio,” said Kelly.

What Happens Next?

While it’s clear that Bitcoin was not immune to the economic calamity caused by COVID-19, Bogart sees the potential for Bitcoin to shine in the coming years.

“Bitcoin is in a unique position as we (hopefully) exit the worst of the global market rout: While it is heavily exposed to the type of liquidity crunch that hit all assets, Bitcoin is significantly less exposed to the prolonged economic headwinds we’ll likely face in the months or years ahead,” explained Bogart. “As the liquidity crunch passes—much like after the 2008 crisis—the marginal investment dollar coming off the sidelines will find its way to assets that are least exposed to sustained economic softness and I think Bitcoin will benefit from that asset allocation trend.”

For Kelly, how Bitcoin performs in the aftermath of the current economic storm will tell the world much more about the “digital gold” thesis than the sharp price decline that occured last month.

Kelly added, “Though, I will say, the size and scale of policy responses to COVID-19 appears to have pulled forward the timeline in which BTC has to prove itself.”

This piece was updated on April 14, 2020.

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