In the ever-evolving world of cryptocurrencies, bitcoin has long been considered the ultimate risk-on asset, known for its volatility and perceived correlation with U.S. equities. However, as we approach the end of 2024, a fascinating trend has emerged: bitcoin’s correlation to both U.S. stocks and ethereum, the second-largest cryptocurrency, has significantly weakened.
Bitcoin’s Divergence from U.S. Equities
Historically, bitcoin and the Nasdaq Composite have often moved in tandem, with periods of near 1:1 correlation over the past five years. This was especially evident in 2021 and 2022 when the two assets seemed joined at the hip, rising and falling together. However, the tides began to turn in the latter half of 2024.
According to TradingView data, the 30-day correlation between bitcoin and the Nasdaq has plummeted to just 0.46, one of the lowest levels recorded in the past five years. In fact, September saw an almost -0.50 negative correlation between the two assets. This divergence became even more pronounced following Donald Trump’s victory in the U.S. presidential election on November 6th.
Since the election, bitcoin has soared to new heights above $93,000, while the Nasdaq has struggled to maintain its all-time highs. Out of the 222 trading days in 2024, bitcoin CME futures and the Nasdaq have only moved in the same direction 52% of the time, according to Investing.com data. This marks a significant shift from the previous years’ trends.
Bitcoin’s Risk-Reward Profile
Despite its reputation as a risk-on asset, bitcoin has demonstrated an impressive risk-reward profile over the past five years. Fidelity data reveals that bitcoin boasts the highest Sharpe ratio among major asset classes, indicating that its returns have outpaced its risk. Furthermore, bitcoin’s correlation with the S&P 500 stands at a mere 19%, suggesting that it may be less influenced by traditional market movements than previously believed.
As bitcoin becomes a larger asset class, now the seventh largest asset by market cap, it is expected to start trading on its own as the market gains a better understanding of the asset.
– James Van Straten, Senior Analyst at CoinDesk
The Decoupling of Bitcoin and Ethereum
Perhaps even more surprising than bitcoin’s divergence from U.S. equities is its weakening correlation with ethereum. Since 2019, the two largest cryptocurrencies have maintained a near 1:1 correlation, with only a brief dip in 2021 when ethereum outpaced bitcoin during the bull market. However, the 30-day rolling correlation between bitcoin and ethereum has now fallen to just 0.35, the second-lowest level on record.
This decoupling suggests that as the cryptocurrency market matures, investors are beginning to differentiate between the unique value propositions and use cases of individual assets. While bitcoin and ethereum may still move in tandem during certain market conditions, their long-term trajectories appear to be diverging.
Implications for the Future of Bitcoin
The weakening correlations between bitcoin, U.S. equities, and ethereum have several potential implications for the future of the world’s largest cryptocurrency:
- Bitcoin may be viewed as a more independent asset class, attracting investors seeking diversification from traditional markets.
- The cryptocurrency market may experience increased differentiation, with individual assets being valued based on their specific merits and use cases.
- Bitcoin’s price movements may become less predictable, as they are less influenced by the performance of other asset classes.
As we move into 2025 and beyond, it will be fascinating to observe how these shifting correlations impact the broader cryptocurrency market. Will bitcoin continue to establish itself as a unique asset class, or will new correlations emerge as the market evolves? Only time will tell, but one thing is certain: the cryptocurrency landscape is undergoing a significant transformation, and bitcoin is leading the charge.
