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Why Bitcoin’s Record-Setting Run Could Bode Well for the Stock Market

Last Updated March 4, 2021 4:58 PM
Josiah Wilmoth
Last Updated March 4, 2021 4:58 PM

Despite a minor correction on Wednesday, bitcoin has been trading at record highs this week and has tripled since the beginning of 2017. The stock market has also posted excellent returns; the S&P 500, for instance, boasts a year-to-date increase of 10.25%.

bitcoin price
S&P 500 Chart from CNN Money

Ordinarily, these phenomena are viewed in isolation. Though the cryptocurrency market cap now exceeds $120 billion, that is still less than half the size of SPDR S&P 500 ETF Trust, a mutual fund which controls $242 billion in assets.

It would seem inconceivable that the crypto markets could have any significant impact on the stock market, at least at current levels. However, Nautilus Investment Research claims to have found a correlation between bitcoin price bull runs and positive movement in the S&P 500.

As reported by Business Insider UK , Nautilus analyzed bitcoin’s price history since 2010 and discovered 18 instances when the bitcoin price rose 30% or more during a single month. In 15 of those instances (83%), the S&P 500 was higher two months later for an average gain of 3.61% vs. 2.07% in months not following a signal. When extending the analysis another month, they found that the index rose in 17 instances (94%) by an average of 4.66% vs. 3.06% in non-signal months.

This research is intriguing, although it’s still quite a stretch to say that bitcoin has a direct influence on stock market traders. Rather, Nautilus suggests that bitcoin mostly attracts highly-speculative investors, meaning that the bitcoin price could be a “barometer for animal spirits in the markets.” In other words, increased risk-taking in the bitcoin markets could signal that traders as a whole are beginning to abandon a cautious investment strategy. Since the crypto markets are much smaller, the mood manifests itself more quickly and to a greater degree.

Since bitcoin is still young, there are not many data points to analyze. However, it is about to get two more. The bitcoin price issued 30% signals on June 16 and August 7, meaning that we will have the opportunity test the trend again as soon as next week.

bitcoin price
S&P 500 Chart from Google Finance

At present, the S&P 500 has increased 1.58% since June 16, making it likely that the two-month results will confirm the correlation.

Featured image from Shutterstock.