We have often emphasized that the increasing financialization of the Bitcoin ecosystem is having the unintended consequence of increasing correlations with other risky asset sectors. While such synergies don't matter in a bull market, they do disrupt Bitcoin's 'digital gold' credential in
turbulent times.
📊 Throughout 2022, #Bitcoin is strongly correlated with #SP500. They had been declining for the first half of the year before recovering in June. $BTC has lagged lately, historically a smaller dependency is good for #crypto long term. https://t.co/EBwzLy8XqD pic.twitter.com/mz0hJbmZCc— Santiment (@santimentfeed) August 30, 2022
What is causing Bitcoin to deviate from the S&P 500? Listen to Findout: A Blog About the Correlation Between Bitcoin and Other Financial Indicators
However, it looks like Bitcoin’s strong correlation with the S&P 500 is finally fading. As Santiment pointed out in the tweet above, Bitcoin has lagged the S&P 500 in its ongoing
bear market rally.
Additionally, Bitcoin’s 60-day correlation with the benchmark stock index is currently around 51%, according to CoinMetrics. By comparison, that statistic hovered around 75% in May. In fact, Bitcoin’s correlation with the larger S&P 500 has gone back to February 2022 Level. Still, we need to witness a continued decline in this statistic before announcing a permanent separation between the world’s largest cryptocurrency and the world’s most liquid stock index.
As mentioned earlier, Bitcoin’s growing correlation with U.S. stocks is a sign of the growing influence of its ecosystem institutions. because In a simultaneous wave of liquidations, institutional investors dumped their Bitcoin holdings to cover margin calls on other flooded positions. As a result, these waves of liquidations help strengthen the still-fragile link between Bitcoin and U.S. stocks. However, by May, this mentality had Dominance has resulted in a continued strong correlation between Bitcoin and growth-oriented U.S. stocks.
In a recent article, we described how a spot bitcoin ETF could be a double-edged sword, as it would free up more institutional money to flow into bitcoin at the expense of higher correlation to the broader risk asset universe.
The Contango Problem – And How To Avoid It In Your Bitcoin Futures ETFs: A blog about how contango affects Bitcoin futures and how to avoid this problem with an inverse ETF
So far, the SEC has only approved bitcoin ETFs based on futures contracts. Bitcoin futures typically trade at a 5% to 15% premium to current prices. Contango is the result of assumed funding rates, perceived volatility in the time remaining to contract maturity, and other factors. this leads to Upward-sloping forward-curve futures ETFs must roll over when the front-month contract expires by buying one contract at the tail end. Consider the following scenario: An ETF maintains monthly contract exposure for six consecutive months. Suppose the January contract is about to expire. as a As a result, the ETF will buy the July contract and use the February contract as the front month contract. However, due to contango, the ETF will buy the July contract at a significant premium to the spot price. If contango persists, this technique will result in greater costs and ETFs are underperforming relative to current prices. Because of this issue, futures-based Bitcoin investment channels are not conducive to mass institutional adoption.
While the SEC has yet to approve a spot bitcoin ETF, BlackRock has now established a spot bitcoin private trust that allows its institutional clients to monitor the price of the world's largest cryptocurrency without the adverse effects of futures contracts.
Remember, BlackRock partnered with Coinbase earlier this month. Under the terms of the agreement, Coinbase will provide BlackRock’s institutional clients with access to the larger crypto space, starting with Bitcoin.
While these changes are sure to increase bitcoin inflows, they are also expected to increase the cryptocurrency's association with larger risk areas. It remains to be seen, therefore, how long the current downturn in this related indicator will last.
Do you think larger institutional participation in the Bitcoin ecosystem is a good thing? Please share your opinion in the space below.
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