Bitcoin’s Volatility Is Spilling Over to U.S. Stocks, Study Says
Bitcoin’s explosive moves are stoking the volatility of U.S. stock futures in haywire trading days, according to Singapore’s DBS Group Holdings Ltd.
In a study that concludes the world’s biggest token is no longer a fringe asset class, DBS’s Chief Economist Taimur Baig and Macro Strategist Chang Wei Liang wrote that S&P 500 contracts tend to register bigger swings after Bitcoin spiked up or down by 10% in the span of an hour.
They analyzed four such trading days -- Dec. 28, Jan. 4, Jan. 29 and May 19 -- as examples of extreme Bitcoin volatility, and compared the relationship to S&P 500 futures. The study showed Bitcoin and the S&P 500 are more positively correlated following a large crypto move, registering as 0.26 versus 0.19 in normal conditions.
It’s still a weak link between the two assets, but DBS said it also found that the variance of returns on S&P 500 futures was 42% greater than normal on those days as well.
“This suggests that broader equity sentiment could become more coupled with sentiment in Bitcoin markets for a temporary period of time,” they wrote. “Given the recent Bitcoin stresses, market participants may be wise to keep an eye on developments in this space.”
Bitcoin jumped 6% to trade near $40,000 on Wednesday. That’s above last week’s low of about $30,000, but well below the mid-April record of nearly $65,000.
Mainstream assets have shrugged off the wild swings so far and there’s not an obvious relationship between stocks and digital currencies. Even so, it’s clear that Bitcoin has become a major force in financial markets, with the crypto meltdown of last week drowning out any other investment narratives.
“Bitcoin is no longer the fringe asset that it once was, given the higher correlations and increased U.S. equity volatility that trail extreme moves in Bitcoin markets,” the DBS team wrote.
In a recent note, JPMorgan Chase & Co. strategists said the cross-asset impact of the cryptocurrency slide has been “mild,” with less equity and credit drawdown compared with meme-stock ructions or this year’s bond selloff.
Even so, other strategists remain cautious. Bitcoin is “firming its grip on markets through volatility, liquidity and correlation,” Ben Emons, managing director of global macro strategy at Medley Global Advisors LLC in New York, wrote this week.
The potential for “financial contagion should Bitcoin drop well below $20,000 cannot be dismissed,” he added.
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