Why Has Bitcoin Become A Leading Indicator For The S&P 500?

2020-9-5 18:00

Yesterday, there was complete and utter carnage across the global financial market. Bitcoin fell over 10% by the daily close and breached below $10,000 at one point before bouncing. The stock market also saw the largest single-day loss since June. 

But why did Bitcoin suddenly lead the stock market almost tick for tick on price charts before the S&P 500 followed? Are these bots turning bearish after crypto began to collapse, or is something else at play? Whatever the dynamics are behind it, the correlation is uncanny.

Did Bitcoin Kick-Off Yesterday’s Stock Market Blood Bath?

Bitcoin has had a stellar 2020 alongside the rest of the crypto market, stocks, and precious metals. The one negative spot across these markets took place on Black Thursday, but every major market other than the Dow Jones was able to set new yearly highs recently.

Bitcoin broke above $10,000, and the S&P 500 and Nasdaq both set new all-time highs. But after the leading cryptocurrency by market cap faced multiple rejections over $12,000, investors may have decided to take profit and de-risk ahead of the upcoming US election.

RELATED READING | WHY THE UPCOMING US ELECTION IS BITCOIN’S BIGGEST RISK

Analysts were warning that things could get “weird” and that investors should consider hedging their portfolio with short positions in stocks.  And while that may have prompted the collapse in stocks, it doesn’t explain why Bitcoin led the dump by nearly a full day.

BTCUSD Versus S&P 500 Hourly Chart Comparison | Source: TradingView Has The Cryptocurrency Become A Leading Indicator For the S&P 500?

Bitcoin spent almost its entire lifecycle having next to no correlation between its price action and the stock market. Big-name investors claimed its uncorrelated price action made it a great addition to any investment portfolio. But since the start of 2020, the crypto market is suddenly trading lock and step with major stock indices and precious metals.

According to the above correlation chart, Bitcoin’s peak was reached a full day ahead of the S&P 500. It also took a full 24 hours later before the drop began in the stock market, versus the crypto market.

RELATED READING | HOW THE GREENBACK TURNED BITCOIN AND CRYPTO INTO A SEA OF RED

Bitcoin tried its best to hold support at the mid-$11,000 range, but failed, falling even deeper. If the S&P 500 continues to follow along with this bizarre correlation where Bitcoin acts as a leading indicator, it could hint at the SPX falling below 3400 today to potentially as low as 3300 before the bell rings on the trading week.

This weekend is a long holiday weekend in the United States, and the stock market will shut down until Tuesday when trading resumes. While the stock market sleeps, the crypto market could get extremely wild.

All eyes should be on Bitcoin as a leading indicator for both the rest of crypto and stocks.

Featured image from Unsplash.

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