Hi dear Publish0x Community,

My name is Carlos, I am a Portuguese national living in Lisbon, and after joining Publish0x about 2 months ago, I decided to take a step forward and to become myself an author in this community. Hope you may find my postings as interesting to read as I have had in relation to the materials I had the pleasure to read in the last couple of months!

As I state in the description of my blog, I am a long-time financial markets enthusiast and have been lucky enough (?) to work in this area for almost 20 years now. 😊 Having said that, only very recently I decided (or had the opportunity) to dig into crypto and so far it has been quite interesting.

Given my background, as a first posting, I thought it would be interesting to share with you my perspective on one of the matters that motivates a significant number of authors to write about – is the price evolution of cryptos and financial markets becoming more or less correlated? Which is to say, are we assisting to a “re-coupling” or a “de-coupling” between prices of those two asset classes? So, with no further delay, let’s get going!

In order to perform this analysis, I decided to consider the price evolution of S&P 500, NASDAQ 100, Bitcoin and Ethereum for the last 24, 12, 6 and 3 months (source for price evolution: Yahoo! Finance). “The ride was a “bit bumpy”, with several ups and downs during the selected time period, so this should be interesting to analyse”, I thought. To give you a perspective of how “bumpy” the road was (or to remind you of it), I included the below chart:

A number of aspects result from the chart:

• Bitcoin had a hell of a ride in the first semester of 2019;
• ETH experienced also a significant appreciation in the first semester of 2019, but to a lesser extent than BTC. In comparison, financial assets had a clearly less impressive record (but still with gains of circa 20% in that time period);
• It is clear the correction experienced by all assets due to Covid-19, and also the strong recovery that followed (which we are still going through).

After some number crunching, the correlations between BTC, ETH, S&P 500 and NASDAQ 100 (NDX 100) for the several time periods considered are as follows (as you are probably aware, the correlation coefficient is comprised between -1 and 1; the closer you are to -1 or 1, the more correlated prices are, either negatively correlated, or positively correlated, respectively):

Some interesting conclusions came up, which I will summarize below:

• In general terms, the more recent the time period that is considered, the stronger the correlations become between financial assets (in this analysis, S&P 500 and NDX 100 were the proxies considered for financial assets) and the two main crypto assets. According to the analysis performed, correlations for the past 6 and 3 months are particularly high;
• Having said that, it was interesting to notice that correlations when one considers the last 12 months are clearly lower, mainly due to the evolution of prices in the second semester of 2019 (quite volatile in the case of crypto, and relatively stable in the case of S&P 500 and Nasdaq 100);
• The more recent the time period that is considered, the greater becomes the correlation between ETH and remaining assets, including BTC.

As implied by the analysis described above, there was a significant correlation in the evolution of prices of financial assets and main crypto assets during the correction phase due to Covid-19 and the subsequent recovery. In addition, as stated above, correlations for the last 6 and 3 months are clearly higher in comparison to longer periods (namely, 24 and 12 months, which were the remaining periods considered in this analysis). This suggests that, for the time being, the case for “re-coupling” may be stronger than the one for “de-coupling”. One thing is for sure – it will be interesting to see how this matter develops going forward! Will crypto assets prices remain significantly correlated with major financial assets, or will they “de-couple” for good? So let’s all stay tuned for further developments!