It’s no longer news that the COVID-19 pandemic unleashed havoc across global economies and brought financial markets to its knees. Even world-renowned stock indexes like the S&P 500, Dow Jones Industrial Average (DJIA) and the FTSE 100 all saw their substantial gains over the last few years wiped out in a matter of weeks. Needless to say, Bitcoin and the rest of the cryptocurrency market also experienced significant nosedives, but their recovery rate has been nothing short of phenomenal.
As the world continues to battle the financial fallout from the coronavirus crisis, let’s see how the number one cryptocurrency stacks up against the leading global stock index.
Image Source: bitcoinexchangeguide.com
The first quarter of 2020 was a historical period for global financial markets as panic-induced selloffs and gradually declining economic activities saw traded assets sink to their lowest levels in decades. Now with various quantitative easing measures and economic stimulus packages across the board, it would appear that both the stock and cryptocurrency markets are in recovery. But let’s dig deeper into how BTC and the S&P 500 performed year to date and whether there is indeed a correlation between them.
S&P 500 Performance in 2020
The S&P 500 index tracks the stocks of roughly 500 of some of the world’s largest companies whose stocks are traded on U.S. exchanges. It essentially represents the stock market's performance by reporting the returns and risks of the biggest companies in the world. For this reason, the S&P 500 is one of the best indicators of overall market direction.
The S&P 500 index started the year on an upward trend and even hit a high of nearly 3,400 points. By mid-February through March, however, the market was firmly in bearish territory. The S&P 500 index dropped by 12% between March 4 and March 11 and then plunged another 9.5% by March 12, to record its sharpest one-day decline since 1987.
S&P 500 index Year to Date Chart | Source: Statista
At the start of Q2, however, the index began to recover as investor confidence began to return. However, it is still far below what may be considered a bull rally. At the time of writing, the S&P 500 is trading at 2,863.39, which is a long way from its 2020 high of 3357.75.
The road to recovery for the S&P 500 and other major stock indices has been hampered by the lull in global economic activity, as well as the recent oil price crash that saw it trading below $0. Overall, the stock market is still enmeshed in a series of red candles as the fallout from the COVID-19 pandemic rages on.
Bitcoin Performance in 2020
Bitcoin started the year 2020 on a high with a bullish rally that saw its price breach the $10K mark and was even on course to set new price levels. By March 12, however, it took a spectacular nosedive that saw it fall below $4,000, its lowest price since the crypto winter of 2018. But barely three weeks after this brutal bloodbath, the price of BTC had regained over 80% of the losses it initially shed.
This is quite shocking, seeing as Bitcoin is often considered as being one of the riskiest possible investments. Of course, one key consideration here is the massive amounts of fiat money being printed by various governments to stem the fallout from the current health crisis. As news of the billion and trillion-dollar stimulus packages hit the scene, it looked like Bitcoin was poised for a bigger rise.
BTC year to date performance | Source: Coinmarketcap
It would seem that people had more confidence in the cryptocurrency markets with several crypto exchanges reporting an unprecedented rise in new Bitcoin users within that period. The quick recovery and the surge in new users is nothing short of impressive for an asset that has suffered countless criticisms. At the time of writing, BTC is trading at the $8,300 to $8,400 price levels in a stunning bull rally that looks set to recover 100% of its pre-COVID 19 gains.
It does make for an interesting phenomenon that even though a significant portion of its return on investment was wiped out, Bitcoin’s value is holding up while the rest of the financial market is in collapse.
And it’s not just the S&P 500 that hasn’t been able to measure up to the performance of Bitcoin. U.S. government bonds, oil, gold and real estate are trailing in its wake.
The Coming Bitcoin Halving may be responsible for the current rally
With less than two weeks to the much-anticipated Bitcoin Halving, it comes as no surprise that the number one cryptocurrency is seeing a rise in market value. Historically, this event has been bullish and the next few days will tell if we’re going to have a repeat. Still, Bitcoin remains a wildly volatile market so it’s important to remain vigilant. The COVID-19 pandemic has left the world in uncharted waters and everything we thought we knew about asset behaviour and investor mindset are being rewritten.
Are Bitcoin and the S&P 500 Correlated?
In the past, Bitcoin has always been regarded as an uncorrelated asset whose price movements are impartial to events of geopolitical or financial crisis. This belief has been undoubtedly dispelled with the crash of BTC along with the S&P500 and the rest of the financial markets, but does this mean it is now a correlated asset?
Source: Trading View
The chart above is plotted using a popular statistical method known as the Correlation Coefficient. Under this method, a correlation of 1.00 means that the prices of the two assets are positively correlated. On the flip side, a correlation of -1.00 means that the prices of the two assets are moving in opposite directions and are therefore negatively correlated.
As you can see, Bitcoin’s price movement has been largely independent of the S&P 500 for much of its history. Then came the global health crisis and Bitcoin was sold off similar to the S&P 500, signalling a positive correlation.
Given Bitcoin’s meteoric rise since its March 2020 bottom, while the S&P 500 is still struggling does make you pause and consider if this positive correlation will only last for the time being, Only time will tell.