Following a sharp decline caused by the COVID-19 pandemic in March 2020, the stock market had seen an upward momentum with the S&P 500 being up by about 86% since then. At the time of writing, however, movement has been going downwards as the S&P sees a fall of 5% in September 2021. Still, SPX is only about 5% off of all-time highs as we prepare for what could be a long expected bear cycle. While September does historically tend to see a sell-off, it was confirmed that this past month was the largest monthly sell-off since March 2020.
What does this mean for Bitcoin? It is commonly considered a hedge against potential market drops, but is this the case in reality? In this Wattum report, we analyze the impact of the recent stock market sell-off on Bitcoin, and whether BTC acted as an effective hedge.
The Relationship Between the Stock Market and Bitcoin
In its early stages, Bitcoin was highly uncorrelated with the stock market. However, as the network has grown and attracted the capital of major investors and institutions, it has naturally shifted to become more correlated. As these investors typically bucket such assets into the high-risk category, they have begun to show more closely tied movements. The below Skew data highlights the one-year rolling correlation over the past year. A significant drop in the one-year correlation took place in February 2021, as the S&P kept increasing while Bitcoin entered a sharp downward trend.
The recent, small spike in correlation is due to the combined sell-off in both the stock market and Bitcoin. With many significant investors considering Bitcoin to be a high-risk asset, a sell-off in the stock market can naturally be accompanied by a sell-off in Bitcoin. The stock market is a much larger market and can impose harsh debt and cash obligations on investors worldwide. As the net worth of such investors drop, they may struggle to meet ongoing debt payments and may naturally sell their high-risk assets to meet such obligations. This puts Bitcoin in the crosshairs, but what does that mean for the current trajectory of BTC?
Bitcoin Trend Remains on the Upside
Despite some recent downside movements, Bitcoin still predominantly moves based on a trend. Extensive research has shown that trend is the primary factor that impacts the price direction of BTC, and that momentum is currently to the upside. Moreover, the recent drop in Bitcoin found significant buyer liquidity just below $40k, indicating that buyers are not willing to let price drop below this mark. Bitcoin has since strongly recovered above $50k and has reached as high as $58k in recent weeks.
Bitcoin may be somewhat correlated with the stock market, but its long-term trend has always been to the upside. Those with Bitcoin exposure are still effectively hedging against the stock market as both assets have never simultaneously maintained a long-term downtrend. Bitcoin miners have exposed themselves to BTC in an extremely lucrative manner. Those with the latest-gen equipment are currently mining at extremely wide profit margins.
Wattum works with miners to ensure that their operations maximally benefit them when upward price movements take place, and that their operations are resilient to drops when they do occur. By ensuring that miners have the best hardware and cost structures, Wattum can keep the impact on profit margins minimal in the case of downward price movements - get in touch with us today.