Macro events are driving financial markets around the world. The BBC just announced today that Russia invaded Ukraine overnight. And when big world events happen, markets react. Bitcoin is down 10% just in the last 24 hours to $35,100 when that happened. Every major crypto project is down today. It’s a sea of red out there.
Big events like a potential war have investors around the world treating all ‘risk assets’ the same. That includes stocks and crypto. But could this war have the same impact on both stocks and cryptos? Or will we see crypto emerge as a safe haven in the times of crises? In this article, you’ll discover which are the Best Crypto Assets to Hold and how S&P 500 and the crypto ecosystem are related. Let’s take a look at S&P 500.
What is S&P 500?
The S&P 500 represents the 500 largest publicly traded companies in the American stock market. It is an index that Standards & Poors created back in 1923, but it’s been at its current 500 since 1957.
It’s a proxy for the market, as it has stocks from many companies in many sectors. Their largeness by being the 500 largest public companies is the only thing they have in common.
Moreover, index investing is very popular. And this is the index people buy and that funds use as their benchmark to try to beat. Most passive investments are based on investing in the S&P 500 index. Passive investments control 54% of the stock market right now.
Risks on Buying stocks on S&P 500 (Risk On /risk Off)
This is an important investing term used by professional money managers and institutional investors. It means that there is a time to be aggressive in the market, which is Risk On. Risk On means you buy risk assets.
These are assets that could be volatile and could earn you money or lose you money. There’s even a trading indicator for it, since many see this as a measure of market sentiment. Risk On sounds like crypto, right? Well, for many professionals, it means stocks. So the S&P 500 would be a Risk On asset.
As the industry matures, investors see crypto as a Risk On asset now too. Coins like the 3 we are discussing today:
- and Litecoin
These cryptocurrencies have all been around long enough and have enough utility that their chances of going to zero are small. Can they lose value? Definitely, I mean, look at the price chart of your favorite crypto in the last 4 weeks. On the other side of it, what is Risk Off? That is when market conditions are choppy, non-trending, too volatile, or unsure of direction.
Does that sound familiar to you? Guess which wartime is? In a Risk Off scenario, like we were in late December in the entire market, and we are right now thanks to macro events, that means the ‘flight to quality’ that we hear about in investment circles. That means:
- US Treasury Bonds (longer term)
- US Treasury Bills (shorter term)
As these assets are much less volatile and less likely to lose money in uncertain times. So what’s happening right now? Gold, as part of the ‘flight to quality’ is up 3% today.
Crypto Seen As “Risk On” With Similar Investing Risks as Stocks
This down trending market we’ve been in for the last couple of months is forcing people to see if crypto really is different from the stock market as an investment risk or not. The calculation people use for this is correlation.
Correlation between 2 assets is a range anywhere from -1 to +1. Negative one means that the assets are negatively correlated. In other words, Asset A goes up by 1%, then Asset B does the opposite, and it goes down by 1%. That’s negative correlation.
Therefore, negative correlation is important for portfolio management. It also helps delta neutral trading strategies where the idea is making money regardless of market direction.
So you may have guessed that +1 means positive correlation and that means as Asset A goes up 1%, Asset B also goes up 1%. That’s positive correlation. And 0 or close to zero means the assets are not correlated and seem to be completely independent of each other.
Many believe stocks and crypto are getting more correlated now due to this general Risk On/Risk Off philosophy.
Moreover, the IMF has a LOT invested in maintaining the status quo financially. Yet, they did some good research on whether correlation is tightening between crypto and stocks. This summary of their findings is that as more institutional investors get into crypto, the more they are likely to move money back and forth. And the more likely they will treat crypto as a similar asset to the other risk assets like the S&P 500.
More About Investing Risks as Stocks
The article itself says pre-pandemic S&P and Bitcoin had little correlation at all. But then most assets dropped during the 2nd and 3rd quarters of 2020 when much of the world was stuck in quarantine. And stocks and Bitcoin both bounced back for a big 2021. The IMF says the correlation increased heavily during this time to its current 0.36. This means that a 1% move in one asset means a 0.36% move in the same direction of the other asset.
Our own calculation of annual returns confirm this positive 0.36 correlation (as you will see in the upcoming table). Even the IMF admits that ‘Our analysis suggests that crypto assets are no longer on the fringe of the financial system’. Pretty big admission from them.
And the IMF isn’t the only one that thinks this or ran the numbers. Blockworks looked at this correlation too specifically with Bitcoin and in the context of the January Effect. The January Effect in the stock market is that the returns for January often are a guide to how the year will be. A positive return in January is usually a positive return for the year. Same on the negative side.
As of the beginning of the new year, Blockworks confirmed the same correlation of 0.36 between Bitcoin and the S&P 500. They also note, which is in this chart from Coinmetrics that correlation has been getting more positive over the last 2.5 years since June 2019.
Decrypt is reporting similarly. They are saying that in early January the correlation spiked to 0.61, a much higher correlation than we’ve seen. And then the NY Times, who are definitely politicizing the use of crypto in general, printed this story yesterday about how Russia does and will continue to use crypto to evade sanctions even with an Ukraine invasion.
What they miss at the Times is that they are making the case for non-government issued money for us.
Our Own Numbers on Annual Returns
We wanted to see for ourselves, so we ran the numbers. And not just on Bitcoin, but on Litecoin and Ethereum too. Because the two have been around for less time than Bitcoin, we looked at correlation numbers between them and the S&P 500 starting from 2014 and 2016 respectively. Those are the first full years of operation for these cryptos.
Here are the correlations we found:
- BTC & S&P 500: 0.36
- LTC & S&P 500: 0.19
- ETH & S&P 500: 0.12
So what does this mean? All 3 cryptos had a slightly positive correlation to the S&P when we looked at the annual returns for each full year the crypto has been active. Yet, Bitcoin’s correlation is the closest to the S&P. Wartime or not, Bitcoin and the S&P 500 are moving more similarly. And why is that? That’s because Bitcoin has both:
- The most institutional investment
- The most interest from professional investors.
As big and important as Ethereum is to the industry, it currently holds little interest from institutions. Companies don’t want to hold it on their balance sheets, the way some like Microstrategy hold Bitcoin on theirs.
MicroStrategy has purchased an additional 660 bitcoins for ~$25.0 million in cash at an average price of ~$37,865 per #bitcoin. As of 1/31/22 we #hodl ~125,051 bitcoins acquired for ~$3.78 billion at an average price of ~$30,200 per bitcoin. $MSTRhttps://t.co/bF6VImC0Qy
— Michael Saylor⚡️ (@saylor) February 1, 2022
One More Interesting Finding
In our calculations, we thought it would be interesting to compare the 3 cryptos to each other, not just to the S&P as we did above. Here’s what we found for correlations:
- BTC & LTC: 0.23
- BTC & ETH: 0.25
- LTC & ETH: 0.85
So overall, the 3 cryptos have a slight correlation with each other, the same way that LTC and ETH have a slight positive correlation with the S&P 500. But the big surprise when looking at the annual returns is that Litecoin and Ethereum have a strong 0.85 correlation. This is based on annual data and does not take into account daily and monthly fluctuations, but still. This was a surprise. It means if you are a long term HODLer one could be a good substitute for holding the other, if this correlation holds.
So what have we learned? Currently, Bitcoin is moving closer to acting like the S&P 500 as a Risk On asset for investment pros. Its correlation with the S&P is higher than 2 of the other longstanding cryptos, Ethereum and Litecoin. For the last 2 years, this correlation for Bitcoin has been growing, meaning the 2 assets move more in tandem than they used to.
And a situation like a huge macro event like an invasion of another country just proves how similarly they react to global events.
Even legacy finance groups that would prefer to kill Bitcoin are saying not only can you not kill it, but it’s acting more like a conventional Risk On asset every day. And the numbers show it, too.
Like most of you watching, we would still prefer to hold Bitcoin or Ethereum or Litecoin more than holding the S&P 500. But could one become a possible predictor of returns for the other? Who knows? But we will be watching.
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