Are Bitcoin and Stock Market Correlated?

Looking at the BTC chart and the stock market, including the Dow Jones and S&P 500, you may have noticed an interesting similarity. At first, the stock market was growing, and even Donald Trump tweeted about it, noting on July 29 that it had grown by 20% since his election. A little bit earlier, Bitcoin reached its all time highs, breaking out the level of $20,000 on December 17.

And then both markets crashed: BTC fell to $6,000, and the stock market was falling even faster and deeper. Curiously enough, patterns was somewhat similar, and both BTC and the stock market reached the bottom of the fall last Monday. The Dow Jones Industrial Average suffered the biggest one-day drop in its history and the S&P had its worst day since 2011. Not surprisingly, some questions began to emerge on whether there was a correlation between these seemingly completely different assets. Is it possible to predict where they will go next?

To determine whether there is a correlation between BTC and the stock market, one should identify reasons of the fall and why investors were selling their assets. A Forbes columnist John Wasik suggested that the stock market was overvalued, hence the high inflation was inevitable. 

However, this explanation is different from the reason of the fall of BTC, which fell by almost 70 percent. Bitcoin was experiencing a justified correction, however news outlets created damaging news background, some of their articles were unreasonable or even false. 

That is why it is difficult to identify, why BTC and the stock market fell at the same time. However, if you look at the correlation graphs, it is possible to notice some connection.

These graphs may confuse, but the point is that if two assets have a negative or positive z-score, then there is evidence that they are directly or inversely dependant.

The graph above shows z-scores. This value shows the direction and strength of the correlation between two sets of data. Higher absolute z-score means that the correlation is greater and conversely.

According to this graph, correlation between bitcoin and S&P 500 is positive, but weak. The correlation between VIX and bitcoin is -0,31, which means that they have moderate negative correlation. 

VIX (CBOE Volatility Index) is the so-called "Wall Street's fear index". Thus, bitcoin is correlated with the VIX, but not with the stock market. However, over the past three years the volatility of VIX was higher that the volatility of BTC. Moreover, the correlation in 2015 and 2016 was almost insignificant. 

And what does analytics think? Fundstrat's Tom Lee believes that the initial correlation between the stock market and bitcoin was limited and will remain the same. 

He told CNBC:

[BTC] could easily look like a chart that looks like the S&P, because both had a parabolic move and then subsequently gave back some of these gains. <...> In the past 12 months, not only did we have a strong rally in equities, we had a strong rally in cryptocurrencies. I wouldn't be surprised if those investors who saw risk-on assets everywhere outperforming globally were also buying cryptocurrencies.