Which Assets Are Closely Correlated with Bitcoin?

Which Assets Are Closely Correlated with Bitcoin?

Reading time: 9 minutes

Following Bitcoin’s (BTC) Halving Event on 20 April, the price of Bitcoin has steadily risen and could soon be challenging all-time highs of $73,845 versus the US dollar (USD). Undoubtedly the most famous Digital Currency, Bitcoin has often been recognised as somewhat of a leader in terms of crypto market trends.

Bitcoin operates using decentralised blockchain technology. Its main idea is to allow people to do business with each other without the need for central banks or officials. This was an entirely novel manner of doing things at the time, and its unique popularity and rise continue to provide opportunities for many.

Assets that Correlate with Bitcoin?

If Bitcoin rallies, do others follow? 

Are there other asset classes that dance to the same tune as Bitcoin? 

When talking about assets linked to Bitcoin, the first thing that comes to mind is usually altcoins, an alternative cryptocurrency to Bitcoin. As you would expect, a strong correlation exists between Bitcoin and many altcoins. In other words, when the price of Bitcoin trades higher, other digital currencies usually follow.

To understand the correlation with Bitcoin, the idea is to measure the relationship between the price movement of different assets in relation to Bitcoin's price. This relationship is quantified using a correlation coefficient – Pearson's correlation coefficient – a statistical measure that ranges from -1 to +1. A correlation coefficient close to +1 indicates a strong linear positive correlation, meaning the assets typically move in the same direction, while a correlation coefficient of zero indicates no relationship, and a -1 reading indicates a strong linear negative correlation (inversely correlated [when one variable increases, the other decreases, for example]). This is visually easier to see on a scatterplot.

Popular Altcoins Correlating with Bitcoin

Ethereum (ETH):

Ethereum often trails behind Bitcoin in discussions about digital crypto assets. But how closely related are they? 

Bitcoin and Ethereum share similarities as both are foundational to the cryptocurrency market, leveraging blockchain technology to secure transactions. Historically, both have also shown a high correlation coefficient and currently, Bitcoin and Ethereum share a correlation coefficient of 0.92, based on a 60-day rolling correlation on the daily timeframe. This represents a very strong linear positive correlation and informs us that the two markets often move in the same direction. This is mainly due to their shared status as leading cryptocurrencies and their common responses to global economic changes.

Ripple (XRP):

Ripple differs from Bitcoin in some ways. It is usually known for working with central banks and payment networks to revolutionise cross-border transactions. Although there are some fundamental differences between Ripple and Bitcoin, the two boast a strong relationship, with a correlation of 0.72 based on a 60-day rolling correlation: a reasonably strong linear positive correlation.

Ripple's price often moves in tandem with Bitcoin as both are heavily influenced by general crypto market sentiment. Given the scrutiny of cryptocurrencies by regulators globally, changes in regulatory environments that affect Bitcoin often spill over to Ripple.

Litecoin (LTC)

Litecoin was made to be lighter and faster than Bitcoin so that transactions could be processed more quickly. It is often called the silver to Bitcoin's gold. Litecoin has a correlation of 0.87 based on a 60-day rolling correlation. Therefore, the price of Litecoin often moves in sync with the price of Bitcoin.

Both coins are based on similar blockchain technology, so they respond similarly to changes and new technologies in the cryptocurrency environment.

Crypto-Specific Stocks Correlating with Bitcoin

Coinbase (COIN)

Coinbase is a huge entry point for buying cryptocurrencies and has a very strong linear positive correlation coefficient of 0.97 (60-day rolling correlation coefficient). Its business plan is very much tied to the cryptocurrency market since it's a platform for buying and selling digital assets. Think of Coinbase as a surfer who knows how to handle the rough waves of the cryptocurrency market. When Bitcoin's price goes up, Coinbase rides the high waves.

Coinbase's unique situation as a Nasdaq-listed company gives buyers an interesting mix of exposure to both the crypto market and the security of a traditional asset traded on a regulated stock exchange.

MicroStrategy (MSTR)

With its bold plan to buy Bitcoin, MicroStrategy has set itself apart in the stock market. Instead of keeping cash or other assets, the company has put a big chunk of its bank savings into Bitcoin, hoping that the price of Bitcoin will go up over time. This has made the company’s share price success closely tied to the price changes of Bitcoin. Microstrategy currently has a correlation coefficient of 0.95, based on a 60-day rolling correlation.

Some investors see MicroStrategy's stock as a de facto Bitcoin ETF because the company has put a lot of money into Bitcoin. This means that the stock price is very sensitive to changes in Bitcoin's market cap and price levels.

Nasdaq Composite Index

Approximately 60% of the companies that trade on the Nasdaq Composite Index are known to be tech and innovation-focused. Normally, the Bitcoin market often moves in ways that are similar to the tech market as a whole.

The correlation coefficient between Bitcoin and the Nasdaq Composite Index is 0.67, based on a 60-day rolling correlation coefficient. This suggests a moderate correlation where both markets may respond similarly to changes in technology investments, investor sentiment towards tech advancements, and macroeconomic factors that influence high-growth sectors.

Both Bitcoin and many of the tech companies listed on the Nasdaq are seen as the frontiers of digital and technological innovation. Their values can be driven by similar factors, such as tech adoption rates, regulatory news affecting tech and cryptocurrencies, and shifts in investor sentiment toward tech and digital assets.

FAQs:

1. What is Bitcoin? 

Bitcoin is a decentralised Digital Currency, also known as a cryptocurrency, created in 2009 by an unknown person or group of people using the pseudonym Satoshi Nakamoto. It operates on a technology called blockchain, which is a public ledger where transactions are verified by network nodes through cryptography and recorded in a publicly accessible ledger.

2. What are altcoins? 

Altcoins, short for ‘alternative coins’, are cryptocurrencies other than Bitcoin. They were created after Bitcoin’s success as alternatives that propose improvements or serve different functions. Popular altcoins include Ethereum, Litecoin, and Ripple, each with unique attributes like quicker processing times or different consensus algorithms aimed at solving various issues perceived in the Bitcoin design.

3. How do you find the correlation coefficient between two different markets? 

You can use the correlation coefficient tool to find the correlation coefficient between two assets. Let’s use the TradingView platform in this context. Simply key in the asset you want, then head over to the indicators tab and search for ‘correlation coefficient’. Input your desired stock or other asset class, and you’ll find out the relationship between the two assets. The rolling period used can be altered in the settings box under ‘inputs’.

4. Why are crypto-specific stocks correlated with Bitcoin? 

The health and direction of the cryptocurrency market have a direct effect on how these businesses run and how much money they make.

5. Can the correlation coefficients between Bitcoin and other assets change over time? 

This is possible because of changes in the market, new rules or technology, or the way people feel about the market. If these changes happen, Bitcoin and these other assets might move less closely together. This could change how you handle risk and how you approach trading certain assets.