Market Extra: ‘Extreme’ moves in bitcoin feed stock-market volatility, study finds

United States

Like it or not, stock-market traders need to keep an eye on bitcoin prices or risk getting whipsawed when the popular but volatile digital asset makes big moves, according to a study by Singapore bank DBS.

“The upshot is that bitcoin is no longer the fringe asset that it once was, given the higher correlations and increased U.S. equity volatility that trail extreme moves in bitcoin markets,” wrote Chief Economist Taimur Baig and macro strategist Chang Wei Liang, in a research report published Tuesday.

The pair decided to study the correlation beginning in November, around the time the market capitalization of the crypto topped $ 1 trillion. Citing a lack of sufficient daily data, they chose to analyze correlations based on hourly returns, comparing bitcoin BTCUSD, +1.53% with continuously traded futures ES00, -0.23% on the S&P 500 SPX, +0.19%.

They found that the correlation was positive for every month since November — meaning that bitcoin and stocks tend to move in the same direction. That said, the correlation was “relatively low” at 0.20.

Correlation measures the strength of a relationship between two assets. A positive correlation of 1.0 would mean they move the same direction in lockstep, while a correlation of -1.0 would mean they move equally in opposite directions. A correlation of zero means there is no statistical relationship.

Related: ‘Where the crypto market goes from here is completely dependent on the stock market,’ says digital-asset tycoon Barry Silbert

But things got more interesting when they tested whether “extreme” moves in bitcoin spillover into equity markets. After all, the pair noted, bitcoin is often viewed as a barometer of investor appetite for risky assets.

To do so, they focused on correlations during periods when bitcoin’s hourly return was either greater than 10% or worse than -10%. The data found four trading days — Dec. 28, Jan. 4, Jan. 29 and May 19 — that met the criteria; the first three were positive, while May 19 saw bitcoin fall sharply.

The subsequent 60 hourly returns after each move showed a jump in the correlation to 0.26 versus 0.19 in normal trading conditions. In other words, the data suggest broader equity sentiment could become more coupled with bitcoin-market sentiment after an unusually large move, they wrote.

Key Words: Carl Icahn says many of today’s cryptos ‘will not survive,’ but asset ‘may be here to stay’

The analysts said other statistical tests were in line with the finding that big moves in bitcoin were followed by higher-than-normal stock-market volatility.

Bitcoin has been under pressure this month, falling at one point more than 50% from its all-time high above $ 60,00. Investors indeed suspected these moves contributed to weakness in equities, particularly tech-related stocks.

“For a few days at least, it felt we had a cryptocurrency tail wagging the financial
markets dog,” said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. “Bitcoin fell around $ 13,000 last Wednesday to officially drop more
than 50% in just a little over a month.”

Bitcoin prices and stocks have largely stabilized since, with the digital asset trading up around 2.3% over the last 24 hours, according to CoinDesk, changing hands above $ 38,500 in recent action. Bitcoin is down 33% for May through Wednesday afternoon, according to FactSet.

Read: ‘Irresponsible’ bitcoin ads banned for being misleading

Major stock benchmarks have seen sideways trade, though the S&P 500 and Dow Jones Industrial Average DJIA, +0.03% remain not far off all-time highs. The S&P 500 is up around 0.4% so far in May, while the Dow has gained 1.3%. The tech-heavy Nasdaq Composite COMP, +0.59% remains down 1.6% month-to-date through Wednesday’s close.

Meanwhile, some analysts worry that bitcoin’s recent volatility could make for a further test of the downside for the crypto.

See: Crypto investor-protection talk heats up but lawmakers hope to allow buyers to ‘dogecoin to their heart’s content’

Jason Goepfert of SentimenTrader wrote in a Tuesday note that bitcoin had plunged below its 200-day moving average, finishing its third-longest run above the technical measure used as a guidepost to an asset’s long-term trend.

The fall contributed to one of the largest ever spikes in a “synthetic” volatility index for bitcoin, he said, noting that “this kind of volatility has had a negative history for bitcoin.”

Meanwhile, the DBS analysts urged investors to remain alert.

“Given the recent bitcoin stresses, market participants may be wise to keep an eye on developments in this space as part of risk and sentiment monitoring,” they warned.

Also read: Bitcoin isn’t a currency or financial asset, but ‘looks like a bubble’: Roubini