Experts explain that as crypto has moved mainstream, its relationship to equity risk has tightened, making it a useful means of measurement
The tech sell off that began earlier in November was immediately preceded by a drop in the price of bitcoin. On November 12th, the S&P 500 Information Technology index hit near historic highs, only to begin a short sell-off that even record earnings from Nvidia couldn’t fully derail. Two days prior, bitcoin began falling sharply in price, losing almost 18 per cent over the following 15 days.
While correlation doesn’t imply causation, there is a growing body of data that shows a growing link between the price of bitcoin and other cryptocurrency assets with certain risk equity sectors, notably large-cap technology. According to Bloomberg, Bitcoin’s 30-day correlation to the Nasdaq-100, another key tech index, hit the highest point since 2022. Whether advisors use bitcoin in their clients’ portfolios or not, this relationship could prove a valuable source of insight into market risk appetites, especially for large-cap technology stocks.
“I think it gives you some sense of where the appetite is, where the sentiment on markets is. Not on the underlying economy per se but just the market sentiment. It might tell you that might be a bit more of a bumpier ride if you start to see some selling in crypto,” says Sadiq Adatia, Chief Investment Officer at BMO Global Asset Management. “Traditionally, crypto would be the last thing you were going to sell because it was a little harder to get out of, and stuff. Now it's more accessible so you're going to see investors move in and out a little bit more quicker as well.”
Adatia notes that the mainstreaming of crypto assets, most notably with the approval of spot bitcoin ETFs by the US SEC, has contributed to this relationship. More institutions and retail investors can access bitcoin more easily, making it behave more like a traditional asset class. Adatia notes that by virtue of the exchange traded nature of bitcoin ETFs, price action has begun to resemble other equities more closely. He agrees that now the price of bitcoin appears to show some correlation with the large-cap technology sector.
Nicholas Mersch agrees that ETFs, institutionalization, and easier retail access have all resulted in bitcoin’s closer relationship to tech stocks. The Portfolio Manager at Purpose Investments sees this shift as part of an ongoing maturation of the asset class. He notes, too, that the correlation between bitcoin and large-cap tech has tended to rise when volatility rises.
“When investors get nervous and they tend to de-risk the same pockets all at once. And Bitcoin now sits in that high beta sort of liquidity sensitive bucket alongside these longer duration tech aspects,” Mersch says. “And I think if you take an optimistic angle of it, this very relationship can really help investors recognize that when the risk reward starts improving, it could be an attractive entry point.”
Whether they’re tracking bitcoin’s price for a means of easy entry, or as a ‘canary in the coal mine’ for other equities, Mersch and Adatia both highlight a few areas that they believe advisors can focus on to fully inform their view. Adatia notes that while price moves may be useful, they could be more of a product of volatility than significant moves into or out of the asset. Mersch highlights some of the actions taken within crypto communities, where long-term holders may be exiting positions which generates online chatter. He also notes that ETFs have allowed more institutions to access these assets, and institutional flows in and out of bitcoin ETFs can be tracked to help inform where appetites for these assets, and by extension other areas considered greater risk, might be. He also notes that because cryptocurrencies are not limited to trading during market hours, price movements in bitcoin can act as a surrogate for their correlated risk equities when their own markets are closed.
While bitcoin may be a useful tool to gauge broad market risk appetites, both Adatia and Mersch acknowledge that the space tends to come with volatility and noise. Rather than using even large liquidation events as reasons to completely de-risk, Adatia notes that these events should be taken with a grain of salt and examined as opportunities to either buy a dip or hedge uncertainty on the margins with allocations to something slightly more defensive.
While the relative novelty of cryptocurrency might make this relationship somewhat new to advisors, Adatia notes that it could be compared somewhat to commodity-linked fiat currencies, like CAD’s relationship with oil prices in the 2000s, or the South African Rand’s relationship with gold. He notes, though, that these relationships have changed in the past and while bitcoin may be a useful indicator of tech investor sentiment, that dynamic could shift.
“It's one of your additional metrics that give you a sign if things are not looking rosy at the moment, that there's a potential for a few days of sell of in the market when you see the flows leaving as an example,” Adatia says. “The market decline tells you it might be a little choppy, but it's the flow part of it that's going to tell you that people are actually moving money out of it. And that means there's a bit of a risk conversion play that's going on at the moment. So I think it's something to utilize.”
