'I confess that even I used to think that the surge in the correlation between bitcoin (BTC) and the S&P 500 was because the institutional investors marched into the market in the second half of last year,' says NoelleInMadrid. 'Now I’m not so sure.'
I often hear that thrown out in conversations as a dismissive way of saying that it isn’t really an “alternative” asset at all, and that all this mumbo jumbo about it being external to the broader economy is just"hopium." But very few who say this have actually dug into the data or thought about the reasoning behind that claim .
Imagine two assets that are clones of each other. How much they move independently will be exactly the same as how much they move together, so the ratio between the two factors will be 1. A correlation of -1 means they move perfectly in the opposite direction. A correlation of 0 means there is no obvious relationship between the two.
Another frequent trap is to assume that a high or low correlation can explain behavior. To some extent this is true – but more often than not, the relationship is coincidental even if related. Ice cream sales and cases of sunburn are highly correlated, but one does not cause or explain the other. What triggered the mood change? Interest rate expectations. Fed funds above 2.50% started to become a remote possibility in terms of market pricing in early April 2022 .
Then, in mid-May, came the implosion of the Terra stablecoin ecosystem. This was a crypto-specific crisis and, unsurprisingly, correlations fell as the damage to crypto values far exceeded that in equities. The de-leveraging triggered by the collapse of hedge fund Three Arrows Capital led to a further decoupling.
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