At the beginning of the Corona pandemic in March 2020, it became clear during the stock market crash that the stock markets can certainly have an influence on Bitcoin and Co. Now, however, a study by Singapore’s largest bank shows that this is also the case the other way around and that significant swings in the bitcoin price also have an impact on the stock market.
This is no surprise because BTC has now a lot of real usage too. Take a look how popular BTC loans have become for example.
- DBS examined correlation between Bitcoin and futures on S&P 500
- Particularly high correlation after “extreme” movements of Bitcoin
- Bitcoin no longer a “fringe asset” as influence grows, according to analysts
In late 2020 and early 2021, the crypto market and Bitcoin, the largest digital currency, saw strong growth. Before a sharp price slide occurred in May 2021, Bitcoin reached a market capitalization of more than one trillion U.S. dollars and the total volume of the crypto market rose to more than two trillion U.S. dollars. Given the massive size of this market, experts at DBS Group looked at whether price developments in bitcoin have any impact on the overall U.S. stock market. The analysts from Singapore’s largest bank published the results of the study at the end of May – and came to the conclusion that the influence of Bitcoin has grown significantly in the meantime and that the cryptocurrency – regardless of an investment – should also be kept in mind by equity investors.
DBS finds correlation between bitcoin and S&P 500
For their study, Taimur Baig, chief economist at DBS, and forex strategist Chang Wei Liang examined the correlation between bitcoin and continuously traded futures on the S&P 500 based on the hourly returns of the two assets since November. November was chosen as the starting time for the analysis because “bitcoin has only grown into an asset class with a significant market capitalization since late 2020,” the two analysts’ report said. It showed that bitcoin’s influence has now grown to such an extent that strong price movements in the cryptocurrency in particular spill over into the stock market.
Overall, according to the study authors, the “Bitcoin was found to be positively correlated with futures on the S&P 500,” as such a positive correlation could be demonstrated for every month since November. However, this turned out to be relatively low, averaging 0.20. However, according to the DBS study, the correlation was significantly higher in each case within 60 hours of “extreme movements in bitcoin” than in periods without such price swings. The analysts define “extreme” as periods in which the bitcoin gained or lost more than ten percent in value within one hour. This was the case on four trading days during the observation period: on December 28, as well as on January 4 and 29, bitcoin’s hourly returns were above the ten percent mark, while on May 19 – in the midst of the price slump on the crypto market – the value specified by the experts was breached to the downside. In the periods following the violent movements in the crypto market, the correlation with the futures on the S&P 500 rose to a value of 0.26, while otherwise it was 0.19.
Analysts: bitcoin is no longer a fringe asset and should be included in risk assessment
While even a value of 0.26 is still relatively low – a correlation is stronger the closer the value is to 1, with a value of 1 representing a perfect correlation and a value of 0 representing no statistical dependence at all – other statistical tests have also shown that large movements in bitcoin are followed by volatility in the stock market that is higher than usual, according to the analysts. As a result, analysts Taimur Baig and Chang Wei Liang conclude in their study, “bitcoin is no longer the fringe asset it once was, given the higher correlation and rising volatility in U.S. equities that follow extreme moves in bitcoin markets.”
When the Bitcoin went down sharply in May, the S&P 500 also weakened somewhat, but was able to recover quickly – unlike the Bitcoin. According to the DBS experts, the price movements in Bitcoin are nevertheless one of the decisive factors for determining risk in the stock market. “Given the recent bitcoin strains, it may be prudent for market participants to keep an eye on developments in the field as part of their risk and sentiment monitoring,” their recommendation therefore reads. After all, bitcoin appears to have long since expanded its influence beyond its former niche of the crypto market.