If stock market has another COVID-19-scale crash, will it affect bitcoin?

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Bitcoin (BTC) had a sharp decline in price alongside the stock market back in March 2020 during Covid-19 pandemic and prevention measures. If stock market crashes again, will it affect bitcoin? The answer is complicated, according to Thomas Perfumo, head of intelligence for crypto exchange Kraken, and Paul Eisma, head of trading at XBTO Group.
“We’ve observed a high positive correlation between S&P 500 and bitcoin this year,” Perfumo told me via email correspondence on August 24, pointing toward bitcoin’s price action traveling in step with a popular mainstream financial market barometer. “Longer-term, I don’t see a stock market crash impairing the value of bitcoin, much like companies aren’t strictly impaired because their stock price goes down.”
In March, the U.S. braced for the impact of the Covid-19 pandemic, putting restrictive measures in place trying to slow the viral spread. In turn, the U.S. stock market suffered its harshest fall in 20 years. Between March 4 and 23, the S&P 500 fell about 30%—a drastic decline for mainstream financial markets, based on TradingView.com data.
Bitcoin also spiraled downward in similar fashion, dropping around 58% between March 7 and 13. Although Bitcoin often sees price moves much larger than mainstream markets, accounting for the asset dropping nearly twice as much as the S&P 500 at their bottoms, the two clearly fell in price around the same time frame.
Bitcoin increased fast, however, bouncing approximately 162% in the 55 days following its crash, while the S&P 500 only bounced about 47% in 77 days.
“What we’ve seen since March is outperformance in several ‘safe haven,’ assets like gold, bitcoin, and even bonds, where equities haven’t matched,” Perfumo explained. “In equities markets specifically, the largest companies like AAPL, AMZN, GOOG, etc. are key contributors to the overall market performance,” he said.
“In fact, I think if you removed the performance attributable to the top ten constituents in many large indices, you may actually see more pain than the headline suggests,” he said, referencing struggles faced by many smaller companies.
The cryptocurrency industry largely sees bitcoin as a store of value asset, usually compared to gold. As Perfumo noted, people view such assets as a hedge to stocks, cash, etc. Bitcoin’s place as a hedge independent from mainstream markets, however, still holds as a debatable concept, as seen in its correlation to other markets at times.

Correlation Metrics

Over at crypto finance company XBTO, Eisma has noticed mainstream market price traveling in line with bitcoin. “The recent correlation of stock and bitcoin is alarming,” .he said.“Correlations are stochastic, extremely challenging to model and even more difficult to trade.”
Eisma pointed toward a measurement from data company Coin Metrics for tracking bitcoin’s price correlation with the S&P 500, while using the Pearson setting, which essentially reveals how similarly two things perform. Looking over 2019, applying the 90-day setting, Eisma observed mixed results, seeing positive correlation between Bitcoin and the stock market price (S&P 500) for the first several months of the year, followed by negative correlation.
“Correlations in 2020 were insignificant at around +1%, until the violent Black Thursday/Friday the 13th selloff in March, when BTC sold off along with equities, driving correlations to approximately +50%,” he said about bitcoin’s dramatic fall amid Covid-19 fears.
“A coefficient of 1 indicates perfect correlation, a coefficient of 0 means there is effectively no correlation, and a coefficient of -1 points to a perfectly inverse correlation.”
“The subsequent rally in risk and similar uptrend in BTC has stabilized correlations in the +35% to +45% range,” Eisma said pointing out continued similar price action between the two assets. “If the current rally in BTC occurred with flat to downwards equity/risk markets, this correlation dynamic would be less worrying, and the price action very bullish for BTC,” he added.
 

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