Equity and bitcoin market’s upward trajectories have stalled recently, which has been tied to uncertainty surrounding the economic ramifications of a second wave of Covid-19. The aforementioned uncertainty has bitcoin and S&P 500 price walking in lock step once again. The heightened correlation calls into question whether bitcoin is a risk or store of value asset; especially since it has historically been uncorrelated to equity markets.
The anonymous bitcoin analyst, PlanB, has risen to notoriety by showing a strong linear price relationship between bitcoin and stock to flow ratio (S2F), including aggressive price forecasts.
Recently, PlanB began tweeting about a meaningful statistical relationship between bitcoin and S&P 500 beyond correlation, called cointegration, as a way to explain the recent price dynamic.
By definition, correlation measures whether two assets move in tandem by some magnitude – either positively or negatively. Cointegration measures the long-term price spread between two assets, i.e. both assets eventually revert to their historical spread despite periodic widening.
Our data analysis suggests that bitcoin and S&P 500 are historically cointegrated. This implies that bitcoin is a risk asset that benefits from the same macro and monetary factors that drive equities, within it’s historical spread.
However, shortening the testing dataset to more recent years, analysis shows no cointegration and weak statistical relationship between the two assets. One possible explanation for this is that bitcoin has historically behaved as a risk asset, but in recent years, it has begun to transition to a store of value asset. Further validation for this hypothesis is the analysis between gold (GLD) and S&P 500 showing no cointegration and weak relationship.
Interestingly, the preliminary data results suggest bitcoin is currently transitioning from a risk asset to a store of value asset. Our hypothesis will only be validated over the coming years if cointegration and statistical relationship break down, thus more closely resembling gold to S&P 500.
Additionally, bitcoin may find itself in a win-win scenario whereby ever-increasing actions by the Federal Reserve to buoy the equity market will benefit bitcoin as well. For example, if equities increase in value, albeit for the wrong reasons, i.e. increased inflation expectations from Fed money printing, bitcoin will follow suit given cointegration.
Furthermore, if and when the Fed’s monetary experiment unravels, or equities experience a Japanese-style lost decade, bitcoin may have already transitioned fully to a store of value asset, thus broken its tether to equity markets.
Disclosure: the author owns bitcoin and ethereum.