Authored by William Cai
Our previous analysis on digital asset correlations was published in early 2021 when the S&P 500 was rallying strongly amid the Covid-19 recovery, coupled with a (still) dovish Fed. Bitcoin was consolidating around $30,000 prior to its ascent to $60,000+ (then back down, then back up) in later 2021. Simply put, the global landscape has dramatically changed since then, which in turn brought about significant transformation to the investing environment and inter or cross market relationships.
In this analysis, we examine the evolution of correlations between digital assets and U.S. equities while gathering any useful insights we can draw from such.
Since early 2021, there has been continued institutional adoption of digital assets within the U.S. While prices ended higher, 2021 was a volatile year for digital assets. The price of bitcoin more than doubled to just over $60,000 in March, then nearly gave it all back before rallying to the highs again in late October. In contrast, throughout 2021, equities continued to trend steadily higher. Investors that allocated even a small portion of digital assets into their investment portfolios benefited from price appreciation and likely saw (de)correlative benefits between digital assets and equities. But then came 2022.
Correlations in 2022
Stubbornly high inflation, a hawkish Fed, persisting supply chain issues, and the war in Ukraine each contributed to a risk-off market environment across nearly all asset classes. Year-to-date equities have plummeted, bonds have been slammed, and digital assets prices have fallen sharply. But, perhaps even more concerning for longer-term investors of digital assets, the often-touted decorrelation to equities and other asset-classes have all but vanished.
Correlation from prior analysis, covering 2018 to 2020:
The average correlation of the top 5 digital assets vs. each other was 72.6% and 63.2% for the top 10 (in terms of market cap as of 11/30/2020). The average correlation of the top 10 digital assets to S&P 500 (using SPY as proxy) was 20.7%.
Now, here is the recent correlation of those same assets, from September 2021 to September 2022:
The average correlation of the top 5 digital assets vs. each other is 78.6% and 75.1% for the top 10. But what has drastically increased is the average correlation to S&P 500 which is now at 45.1% (versus 20.7% during 2018 to 2020). If one looks at daily moving correlation, an even more drastic picture emerges.
The chart below shows a 30-day rolling correlation of bitcoin versus the S&P 500:
Some investors bemoan the disappearance of the (de)correlative benefit of digital assets to equities and other assets, but we believe it is a signal of the further maturation of the digital asset space. These unique assets no longer trade in their own silo but are now taking cues from major asset classes and overall economic conditions. Digital assets have shown themselves to be (currently) quite risky and move in tandem with other risky assets, such as equities. Does this mean that the expectation of correlative benefits of investing in digital assets is entirely misplaced? No, we believe correlations will normalize and the (de)correlative benefit will again appear once global markets normalize1.
Correlations within U.S. Equities
For completeness, below is the same correlation analysis previously completed but updated to this past year.
Top S&P 500 Constituents
Banks and other Financial Institutions
The average correlation of the top 5 S&P 500 constituents vs. each other is 69.8% and 57.4% for the top 10. While the average correlation of the top 5 financials vs. each other is 77.2% and 71.1% for the top 10 financials.
Asset class intra-correlations summary:
The intra asset correlation for digital assets have increased in the past 12 months versus the 3 years prior. It also shows that even though the space has matured versus its nascent years, digital assets still have a higher likelihood of trading together versus other assets classes where divergences in individual asset performances is more likely in risk-off market environments.
A Quick Note on Correlations to Gold
We have included gold (using GLD as proxy) in all the above correlation analysis of digital assets and U.S. equities. The correlation of SPX 500 to gold was 5.7% from 2018 to 2020, and 3.9% from September 2021 to September 2022. The correlation of bitcoin to gold was 18.7% from 2018 to 2020, and 7.9% from September 2021 to September 2022. While bitcoin does have intrinsic properties (i.e., store of value, scarcity, a global asset, etc.) that are similar to gold, its price performance in 2022 has demonstrated that it is a risk asset rather than a safe haven asset in a risk-off market environment.
As the digital assets space continues to develop and evolve, digital asset price correlation also does not stay static. In this risk-off market environment of 2022, we have seen increases in both intra-asset correlations within digital assets and in correlations to other risk assets such as equities. Digital assets have emerged from its niche silo to become part of the global trading of asset classes that take cues from macroeconomic drivers. Digital asset correlations will continue to evolve as market conditions change and it is likely we will see (de)correlative benefits emerge again.
1 In the last two weeks of September 2022, we have seen 10-day rolling correlation between bitcoin and S&P 500 drop below 25%. A two week period is a small sample size, but it could be a glimpse of the return of (de)correlative effects once the markets do normalize.
THE INFORMATION CONTAINED HEREIN REPRESENTS THE AUTHOR’S SUBJECTIVE BELIEF AND IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN DECISIONS AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN. NEITHER THE AUTHOR NOR ANY OF HIS AFFILIATES ACCEPT ANY LIABILITY WHATSOEVER FOR ANY DIRECT OR CONSEQUENTIAL LOSS HOWSOEVER ARISING, DIRECTLY OR INDIRECTLY, FROM ANY USE OF THE INFORMATION CONTAINED HEREIN. THIS INFORMATION IS BASED ON DATA FOUND IN INDEPENDENT INDUSTRY PUBLICATIONS. ALTHOUGH WE BELIEVE THE DATA TO BE RELIABLE, WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS ARTICLE. MANY OF THE STATEMENTS CONTAINED HEREIN REFLECT OUR SUBJECTIVE BELIEF.