Stronger Correlation Between Cryptocurrency and Stock Prices

February 20, 2022

The emergence of digital assets like cryptocurrencies has certainly shaken the world’s financial system. The market value of these assets rose from $620 billion in 2017 to $3 trillion nearing the end of 2021. Amid soaring popularity and adoption of crypto assets, analysts have concluded increasingly greater correlations between crypto assets with traditional holdings like stocks.

Prior to the COVID-19 pandemic, crypto assets such as Bitcoin and Ethereum showed mild correlation with stock indices. Most believe that cryptocurrencies are a great option to help diversify risk and act as a hedge against swings in other asset classes. Needless to say, this theory was proven otherwise starting early 2020.

Returns on Bitcoin did not move in the same direction of the benchmark stock index for the United States, S&P500 between 2017-2019. The correlation coefficient between these assets was a mere 0.01, but have since skyrocketed to 0.36 in the last financial year.

Nevertheless, stronger correlations between cryptocurrencies and traditional assets denote that cryptocurrencies may be acting as a risky asset. This means that the initial diversification benefits may be less than what is initially perceived.

Stocks With the Highest Correlation to Bitcoin and Ethereum

According to data from JPMorgan, below is a list of the stocks with the highest correlation to popular cryptocurrencies Bitcoin and Ethereum:

  1. Microstrategy (MSTR). 

3-month correlation to Bitcoin: 75.8%, 3-month correlation to Ether: 73.6%

  1. Bitfarms (BITF)

3-month correlation to Bitcoin: 70.8%, 3-month correlation to Ether: 68.5%

  1. Coinbase (COIN) 

3-month correlation to Bitcoin: 64.6%, 3-month correlation to Ether: 55.3%

  1. Hive Blockchain (HIVE)

3-month correlation to Bitcoin: 63.3%, 3-month correlation to Ether: 65.4%

  1. Riot Blockchain (RIOT)

3-month correlation to Bitcoin: 65.3%, 3-month correlation to Ether: 58.7%

Systemic Concerns Over Correlation

Increased and sizable co-movement and spillovers between cryptocurrencies and traditional assets may permit the transmission of shocks that may destabilise the financial market.

The growth of cryptocurrency, from its adoption, high volatility and valuations require the need for a comprehensive and coordinated global regulatory framework. Such a framework would establish clear requirements for stakeholders within the crypto ecosystem to make an equitable market.

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