Traders analyze the movements of financial instruments to gauge market sentiment and predict trends, operating under the belief that certain assets are correlated. Understanding the correlation between two assets provides valuable insights.
Both Bitcoin and stocks are speculative assets, often traded based on price speculation rather than intrinsic value. This similarity implies that stock movements may reflect the market’s risk appetite, potentially allowing predictions about Bitcoin’s behavior. Investors willing to take on more risk may invest in these speculative assets.
This analysis evaluates the correlation between stocks and Bitcoin, examining their historical interactions. The goal is to determine whether stock market movements can predict Bitcoin’s price behavior.
This study uses a quantitative research design to analyze the relationship between Bitcoin prices and the stock market over the past five years with the S&P 500 Index serving as a proxy for the stock market.
Bitcoin closing prices are available daily, while the S&P 500 Index does not trade on weekends and holidays. To align the S&P 500 Index values with Bitcoin prices, missing dates were forward-filled with the last available trading day value.
Daily Pearson correlation coefficients were calculated between BTC prices and S&P 500 Index values.
A 90-day rolling correlation analysis was conducted to assess the variation of correlations over time.
Volatility analysis (standard deviation of returns) for both assets was performed to assess their risk levels. This involved calculating the standard deviation of returns over a specified period, enabling us to identify which asset shows greater price fluctuations, indicating higher risk.
When making an investment decision, consider that Bitcoin may provide higher returns but comes with greater risk, while the S&P 500 offers more modest returns with less risk. Your choice should align with your investment goals and risk tolerance.
The Pearson correlation coefficient indicates a moderate positive correlation between BTC daily returns and S&P 500 daily returns.
The 90-Day Rolling Correlation is primarily positive, suggesting that BTC and S&P 500 returns generally move in the same direction. The correlation coefficient usually falls between 0.1 and 0.6, reflecting a weak to moderate correlation between the returns.
A beta of 1.03 indicates that Bitcoin closely follows the broader market but reacts more intensely to market movements. This suggests that, while Bitcoin is influenced by the same macroeconomic factors as the S&P 500, it carries a slightly higher risk compared to the market.