Defining and measuring correlation
Correlation is a statistical term that measures the relationship between two variables. When plotting the variables on a chart, if both rise at the same time, they are said to be correlated. In contrast, if one rises as the other falls, they are said to be inversely correlated. It’s worth noting that a correlation does not mean there is any causal link between the two variables, but a correlation can often indicate a causal or influential link, making it an interesting metric for investors.
Correlation is measured using the Pearson correlation coefficient, which indicates correlation using a sliding scale between 1, showing a strong positive correlation, and -1, showing a strong negative correlation. Zero represents no correlation.
There are no standard metrics for comparing the performance of all stocks against all cryptocurrencies. However, a common way to measure the correlation is to compare the price of BTC, the largest and most influential crypto asset, against the performance of a major stock index, such as the S&P 500 or the NASDAQ Composite, using the Pearson correlation methodology.
Historical correlations between crypto and stocks
For much of Bitcoin’s history, BTC prices appeared to be uncorrelated to other major asset classes, including stocks and gold, the latter of which typically moves in inverse correlation to the stock markets. Some speculated that BTC could act as a “safe haven” asset during a global economic crisis. However, from 2009 until the onset of the Covid-19 pandemic in 2020, stocks had been in a period of almost uninterrupted growth, so this theory remained untested.
When the stock markets crashed at the start of the pandemic in March 2020, BTC surprised the market by performing almost in lockstep, shedding over 50% of its value in two days. For the next two to three years, the Pearson correlation between BTC and major stock indices remained mostly high, with a few discrepancies, such as when FTX collapsed in late 2022, causing the crypto markets to fall rapidly out of sync with other markets.
Intriguingly, BTC bucked its own trend in 2023 and largely uncoupled from stock prices. Correlation rose again with the 2024 rally following the approval of several Bitcoin ETFs in the US. Therefore, correlation does not appear to show any consistent long-term patterns – at least so far in the relatively short history of cryptocurrencies.
Factors affecting correlation
There are several factors that can work for or against crypto’s correlation to the stock markets.
Supply and demand
The price of both stocks and cryptocurrencies can fluctuate according to supply and demand. However, the forces governing supply are different in each market. Each company can control the circulating supply of its own stock by engaging in practices such as buyback schemes or share issuance. In contrast, the supply of BTC is fixed, and the halving events that occur approximately every four years mean that the amount of BTC entering circulation steadily decreases over time.
As such, Bitcoin’s halving events could impact any apparent correlation with the stock markets by causing prices to behave differently.
Macroeconomic factors
Stock prices are vulnerable to macroeconomic factors, such as rising energy prices, supply chain disruptions, or changes to monetary policy. Cryptocurrencies may also be affected by some of these influences. For example, Bitcoin mining is dependent on electricity. Although the relationship between the cost of mining and the price of BTC is complex, some research has shown that the two can be correlated.
Similarly, monetary policy decisions, such as raising or lowering interest rates to control inflation, can also affect markets as they affect bond yields, which may affect stock purchasing decisions as investors rebalance their portfolios.
As cryptocurrencies become more embedded into the mainstream financial system, such factors are more likely to influence prices, as there is more crossover in the investor groups, creating more of a long-term correlation.
Market integration
Over time, Bitcoin has become more acceptable to mainstream investors and, as such, more integrated with traditional financial markets – a factor that could favor correlation.
For example, some publicly listed companies, such as Microstrategy or Tesla, hold significant amounts of Bitcoin on their balance sheets. If the price of Bitcoin goes up, then the value of these companies will also rise, creating a positive correlative effect. Similarly, exchange operator Coinbase, listed on NASDAQ in 2021, also has a significant amount of value tied up in crypto. As the value of that crypto fluctuates, the share value of Coinbase will also be affected, contributing to a positive correlation.
Other price factors
Factors such as regulatory changes or significant adoption news have been shown to influence cryptocurrency prices. Examples include the 2024 Bitcoin ETF approvals or the integration of cryptocurrencies by PayPal in 2020, both of which preceded sharp price rallies. However, since the effect of these events on the stock markets was negligible, any correlated price increase is likely to be coincidental rather than causal.
Market correlation essentials
- Correlation between the cryptocurrency and stock markets may indicate similar forces affecting prices.
- The historical correlation between BTC and major stock indices shows some long-term patterns but little ongoing consistency.
- Factors that could positively affect correlation include market integration and macroeconomic factors, while Bitcoin’s halvings could decouple prices.