Bitcoin & Ethereum Trading: All-Time High Correlation with S&P 500

Alongside the Dow Jones and the Nasdaq Composite, the S&P 500 is one of the premier large-cap indexes that many investors use to track the performance of America’s biggest companies.

With that said, the S&P has reigned in mainstream markets for longer than the cryptoeconomy has even existed, a reality that’s made it so the top cryptocurrencies — namely bitcoin (BTC) and Ethereum’s ether (ETH) — have historically traded with little correlation with the major index.

This month, however, that dynamic was notably reversed as Wall Street has repeatedly plunged due to sharp increases in pandemic-driven global economic anxieties. Amid this unprecedented de-risking environment, bitcoin and ether hit a new correlation record with the S&P.

BTC & ETH Tracking SPY

Mainstream and crypto markets started their current plunge into bear market territory on Monday, March 9th, when the breakout of an oil price war between Russia and Saudi Arabia and the WHO’s designation of a global coronavirus pandemic sent investors running for the exits.

The panicked markets have been ugly and volatile since then, and in this span BTC and ETH have shown a sharp, acute increase in correlation with the intraday movements of the S&P. Let’s break down the numbers.

For those who are rustier on statistics, a correlation coefficient measures variables’ statistical relationship using values between -1 and +1 — negative values indicate variables act oppositely, and positive values indicate they act similarly.

According to data from crypto data provider Coin Metrics, on February 20th, 2020, BTC-SPY had a correlation of -0.04 and ETH-SPY a correlation of 0.03, suggesting there was little relationship for both in either direction.

Those numbers jumped up as the markets dived on March 9th, when BTC-SPY and ETH-SPY respectively hit correlations of 0.12 and 0.15.

Things spiked higher yet on March 15th when the correlations reached new all-time highs of 0.55 for BTC-SPY and 0.59 for ETH-SPY. Just two days later on March 17th, records were set once again when Wall Street was shellacked with more sell-offs and the correlations between BTC-SPY and ETH-SPY hit new peaks of 0.59 and 0.61 respectively.

We’ve Never Seen It Quite Like This

Of course, a correlation between the S&P and the top cryptocurrencies only tracks how much knowing the performance of the SPY would help us predict the performances of BTC and ETH.

Even still, the recent surge in the correlations is quite notable because of how historically unprecedented they are.

Consider this: before March 15th and March 17th, the two previous correlation all-time highs came in December 2018 when both BTC-SPY and ETH-SPY hit 0.31 and then back in February 2011 when Ethereum didn’t even exist yet and a very young bitcoin saw its correlation with the S&P jump up to 0.34.

Why the Correlation Spike?

Simply put, the growing prospects of a crisis-driven global economic recession has sent investors fleeing for the safety of cash (or in the case of the cryptoeconomy, stablecoins) in droves this month.

Almost nothing’s been spared in this major de-risking environment, not the best stocks nor the best cryptocurrencies. That’s acutely pushed investors around the world toward sell pressure en masse, which is why the S&P and BTC and ETH have seemingly been moving in tandem in recent days.

The natural ensuing question is how long will this apparent spike in correlation last? Presumably for as long as the global economy continues in its current downward spiral, one would think, as the de-risking we’re seeing now has generally been across the board.

In other words, for as long as firms and folks continue to acutely sell-off their SPY holdings, the same could bear out for BTC and ETH. But there’s no reason to think that such correlations will last once the global economy stabilizes and the cryptoeconomy gains a mind of its own again.

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