The correlation between Bitcoin (BTC) and the S&P 500 has hit a 10-month low. Historically, this is a bullish sign for the dominant cryptocurrency.
A low correlation with the S&P 500 is an optimistic factor for Bitcoin because it means that BTC doesn’t lag behind the broader risk market. The analysts at Santiment:
“The correlation between #Bitcoin and # SP500 $ SPX is great for identifying when $ BTC can fluctuate regardless of traditional markets. We found that #crypto is best when that correlation is low … and our 30-day correlation model shows that it is at a 10-month low. “
Why Bitcoin is likely to outperform the S&P 500 in the medium term
Bitcoin’s correlation with the S&P 500 could go down or stay low in the short term for two reasons.
First, the US stock market could correct in a take profit pullback as Bitcoin continues to recover.
Second, the US stock market could rise in tandem with BTC, but Bitcoin is seeing bigger gains over a longer period of time
Big investment banks like JPMorgan believe the US stock market is in the middle of a bull run. The strategists say US stocks could take a hit in January if stocks continue to be borrowed.
Nonetheless, strategists expect stock momentum to spill over into 2021. If so, the latter scenario is more likely, where Bitcoin would have to outperform the S&P 500 to get a low correlation.
The post-halving cycle remains the most compelling reason for a continued Bitcoin uptrend in 2021 that could allow BTC to outperform the S&P 500.
Background: Bitcoin goes through a block reward halving every four years. The last two halves took place in 2012 and 2016, and after each halving the BTC price rose over a long period of time.
A Block Reward has historically had a positive effect on the price of Bitcoin as it affects its scarcity. Every time the Block Reward is halved, the amount of BTC that miners can mine decreases. As a result, there is a smaller number of BTC that are produced on a daily basis. Since the supply of BTC is fixed, BTC becomes scarcer as a result.
Bitcoin tends to recover for 12 to 15 months after each halving. Given that the last halving occurred in May 2020, BTC could bounce back through mid-2021 if the bull cycles of the past continue.