Bitcoin mining and local stock market performance correlations

Crypto is an uncorrelated asset class, in response to its proponents, and as such ought to contribute to portfolio diversification. Nevertheless, analysis has proven that this declare has not held up nicely.

We examined the connection between the place bitcoin mining takes place and the way the efficiency of native inventory markets correlates with bitcoin costs and located that in america specifically, the efficiency of the S&P 500 and bitcoin costs have proven a optimistic correlation over the previous 5 years. years.

Since america and China are the place a lot of the bitcoin mining has taken place over the previous 5 years, we have used the S&P 500, Hold Seng, and Shanghai Composite as our regional proxies. We calculated the nine-month rolling correlation between bitcoin returns and every of the three indices utilizing weekly information. We then in contrast this to the bitcoin hash charge by nation from September 2019 — which works again method past dependable information — to January 2022. Bitcoin hash charge measures the computational energy of the bitcoin blockchain and is a proxy for a way a lot bitcoin mining is finished.

Previous to November 2020, greater than 60% of bitcoin mining was accounted for by China. However quick ahead to November 2021 and China’s share has fallen to round 15% in response to authorities strikes to cut back bitcoin mining. Over the identical time interval, america jumped from accounting for about 10% of worldwide bitcoin mining to greater than 35%.

Bitcoin hash charge distribution by nation, from September 2019 to January 2022

Bitcoin mining distribution by nation, 2019 to 2022

These traits make the November 2020 to November 2021 timeframe a wonderful window to see how bitcoin correlations – costs – to the index regulate with the ebbs and flows of bitcoin mining. We discovered that as cryptocurrency mining rose within the US between November 2020 and November 2021, bitcoin’s correlation with the S&P 500 rose to 0.39 from 0.28. However as cryptocurrency mining in China declined over the identical interval, Bitcoin’s correlation with the 2 Chinese language indices additionally declined. Bitcoin’s correlation for the Hold Seng Index and Shanghai Composite decreased to -0.14 from 0.21 and -0.44 from 0.09, respectively.

Bitcoin correlations with inventory indices

November 2020 November 2021
Normal & Poor’s 500 0.283 0.386
Hold Seng 0.213 -0.138
Shanghai boat 0.085 -0.437

The outcomes point out that the extra bitcoins are mined in a given nation, the upper the correlation between the cryptocurrency and the native inventory markets. With the decline of bitcoin mining within the area, the connection between bitcoin and the native inventory markets can be declining.

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Concerning the annual correlations between bitcoin costs and the respective indices, our speculation holds there as nicely. The extra bitcoins are mined someplace, the larger the correlation between the bitcoin value and the native inventory markets. This relationship was strongest with the S&P 500 and Shanghai Composite and fewer so with Hold Seng over the total time interval.

Annual Correlations: Bitcoin and Inventory Indices

2016 2017 2018 2019 2020 2021 2022
Normal & Poor’s 500 -0.174 -0.119 –0.045 0.064 0.155 0.186 0.747
Hold Seng -0.289 -0.378 0.010 0.011 0.148 -0.190 0.400
Shanghai boat 0.014 0.253 0.096 0.122 0.169 —0.390 –0.040

Taken collectively, our outcomes recommend that the place bitcoin is mined could affect the way it strikes and which inventory indices it strikes with. This impacts the kind of diversification that bitcoin could or could not deliver to the portfolio.

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All posts are the opinion of the creator. As such, it shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of the CFA Institute or the creator’s employer.

Picture credit score: © Getty Pictures / photonaj

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Derek Horstmeyer

Derek Horstmaier is a professor on the George Mason College Faculty of Enterprise, specializing in exchange-traded funds (ETF) and mutual fund efficiency. He’s at the moment the Director of Junior Monetary Planning and Wealth Administration at George Mason College and based GMU’s first student-managed funding fund.

Zhihan Chen

Zihan Chen is a senior at George Mason College pursuing a bachelor’s diploma in finance. Plans to check for a grasp’s diploma in finance or economics after commencement. He’s a Dean’s Listing pupil, member of the FNAN & FPWM Honors Applications, and a Beta Alpha Psi Candidate. He additionally works as an analyst on the Montano Scholar Funding Fund and can pursue a profession in finance after commencement.

Yue Shi

Yuyi Shi is at the moment in her senior yr at George Mason College the place she is pursuing a bachelor’s diploma in Finance. Its focus is on information administration and evaluation, cash administration, and potential stock evaluation. After commencement, she plans to proceed her tutorial profession by finishing a grasp’s diploma in finance.

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