According to a study by Singapore bank DBS, stock-market traders must keep a watch on bitcoin prices or risk being whipsawed when the popular but volatile digital asset makes huge changes.
In a research study released Tuesday, Chief Economist Taimur Baig and macro strategist Chang Wei Liang stated, “The consequence is that bitcoin is no longer the fringe asset that it once was, given the greater correlations and heightened U.S. equity volatility that precede strong moves in bitcoin markets.”
Beginning in November, when the market capitalization of cryptocurrency surpassed $1 trillion, the couple began to investigate the association. They chose to study correlations based on hourly returns, comparing bitcoin BTCUSD, 1.53 percent with constantly traded futures ES00, 0.00 percent on the S&P 500 SPX, +0.18 percent due to a lack of daily data.
Since November, they discovered that the correlation has been positive, indicating that bitcoin and stocks tend to move in the same direction. However, at 0.20, the correlation was “quite low.”
The intensity of a relationship between two assets is measured by correlation. A positive correlation of 1.0 indicates that they move in lockstep in the same direction, whereas a negative correlation indicates that they move equally in opposite directions. There is no statistical link if the correlation is 0.
But things got much more interesting when they looked at whether “extreme” bitcoin price movements impacted equity markets. After all, bitcoin is frequently used as a measure of investor appetite for riskier investments, according to the duo.
They did so by looking at correlations during times when bitcoin’s hourly return was either better than 10% or worse than -10%. The data revealed four trading days that fit the criteria: Dec. 28, Jan. 4, Jan. 29, and May 19; the first three were positive, but May 19 saw bitcoin decline dramatically.
Following each move, the 60 hourly returns indicated a spike in the correlation to 0.26, compared to 0.19 in regular trading conditions. In other words, the data suggests that following an extremely strong increase, broader equities mood may become more coupled with bitcoin-market mood, they noted.
Other statistical analyses, according to the analysts, supported the result that large swings in bitcoin were followed by higher-than-normal stock-market volatility.
Bitcoin has been under pressure this month, plummeting more than 50% from its all-time high of almost $60,00 at one point. These moves were suspected by investors to have contributed to equities’ downturn, particularly in tech-related firms.
“It felt like we had a cryptocurrency tail wagging the financial markets dog for at least a few days,” technical analyst Andrew Adams wrote in a note for Saut Strategy on Wednesday. “Bitcoin dropped to roughly $13,000 on Wednesday, marking a more than 50% slump in just over a month.”
Bitcoin prices and stock prices have mainly stabilized since then, with the digital asset trading up roughly 2.3 percent in the last 24 hours, according to CoinDesk, with recent trades exceeding $38,500. According to FactSet, Bitcoin is down 33% for the month of May through Wednesday afternoon.
The S&P 500 and the Dow Jones Industrial Average DJIA, -0.25 percent have traded sideways, though they are still close to all-time highs. In May, the S&P 500 has risen about 0.4 percent, while the Dow has risen 1.3 percent. Through Wednesday’s closing, the tech-heavy Nasdaq Composite COMP, +0.74 percent was down 1.6 percent for the month.
Meanwhile, other analysts are concerned that bitcoin’s recent volatility would lead to another test of the crypto’s bottom.
Bitcoin had plummeted below its 200-day moving average, ending its third-longest run above the technical measure used as a guidepost to an asset’s long-term trend, according to SentimenTrader’s Jason Goepfert in a Tuesday note.
According to him, the drop contributed to one of the highest recorded jumps in a bitcoin “synthetic” volatility index, despite the fact that “this kind of volatility has a poor history for bitcoin.”
Meanwhile, DBS analysts advised investors to stay vigilant.
“Given recent bitcoin pressures, market participants may want to keep an eye on developments in this arena as part of their risk and sentiment monitoring,” they said.