On Tuesday, two of the major U.S. indices, S&P 500 and the NASDAQ closed yesterday’s trading at record highs. Meanwhile, the Bitcoin price has been surging for the last few weeks. The bullishness in U.S. equities and Bitcoin has prompted investors to believe that there might be a correlation between these two seemingly different asset classes.
But in theory, Bitcoin is supposed to be like Gold, a safe haven commodity that should surge in value when investors are pessimistic about the economy. However, in reality, there is a link between the U.S. economy and the value of cryptocurrencies.
Understanding the Relationship Between Risk and Stock Price
Rational investors are always risk-averse and in the stock market, the stock price volatility is often taken into consideration as a proxy for risk. The CBOE Volatility Index (VIX) is considered to be one of the most reputed measurements of volatility in the U.S. based S&P 500 stock index.
If we take a look at the correlation between VIX and S&P 500, we can see that there is a clear negative correlation. Since the VIX is considered as the “fear gauge,” it makes perfect sense that investors would be bidding up the stock prices when they feel less fear or safer. Hence, whenever the VIX goes down, it is natural to expect that the stock price in the U.S. will go up.
Is There Any Correlation Between Stock Volatility and Bitcoin?
While common sense would dictate that if investors are feeling fear, they would invest in safe-haven assets like Bitcoin, the opposite happened in the first few months of 2019. Since the beginning of 2019, the CBOE VIX and Bitcoin price have seemingly developed a negative correlation.
As we can see in the chart above, when VIX went down, the price of Bitcoin surged, establishing a strong negative correlation. In fact, the negative correlation seems to have been accelerating in recent weeks.
Putting It All Together with Gold Price
Taking a look at the S&P 500, the NASDAQ 100, VIX, and Bitcoin in the same chart along with the price of Gold against the U.S. Dollar, it is evident that something interesting is happening with cryptocurrencies. Instead of having a positive correlation with the Gold, the Bitcoin price has diverged and joined the group of U.S. equities.
While the price of Gold went down, the Bitcoin price went up by 35.93%. Meanwhile, the S&P 500 went up by 18.02% and the NASDAQ 100 went up by 24.27%.
The Bottom Line
Historically, economists and analysts interpreted the Bitcoin and other cryptocurrencies to be safe haven assets. In fact, just last week, Forbes went on to say that Bitcoin is the new gold. However, our thesis shows a clear negative correlation between Gold and Bitcoin in the first four months of 2019.
If we take the negative correlation between the VIX and Bitcoin, it is even safer to say that investors are no longer considering Bitcoin as an alternative safe haven asset when the “fear gauge” goes up in the U.S. equities markets.
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