Big Investors May Be Dragging Bitcoin Toward Market Correlation

  • Morgan Stanley clients see cryptocurrency as risk barometer
  • Institutions may increase correlation, but too early to know

Bitcoin Sees a Slight Bounce Back

It may just be a coincidence that Bitcoin’s plunge preceded the latest equities selloff, but Morgan Stanley clients are watching the digital currency as a potential leading indicator for risk in the broader stock market.

“The idea is that as institutional investors seek out increasingly higher level of risk/return, that Bitcoin may represent the most risk/potentially highest return available, and hence could be evolving quickly into a primary barometer,” Morgan Stanley analysts led by James Faucette wrote in a note Wednesday. “And our conversations with investors certainly give weight to that view.”

While the analysts agree that Bitcoin’s allure to institutional investors may increase its short-term correlation with other assets, such as equities, they say it’s too early to fully draw that conclusion. Looking back 14 months, the cryptocurrency’s 30-day interaction with the S&P 500 Index has oscillated but stayed below an absolute level of 0.4. A reading of 1 indicates they’re moving in lockstep.

The correlation has risen sharply since late 2017. But the current level’s still short of the peak reached around June.

“Looking at the overall trend,” the analysts wrote, “it is clear that correlation with the broad equity market has not been fully established.”

— With assistance by Lily Katz

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