Bitcoin: More "Safe-Haven" Than U.S. Treasuries

The price fluctuations of Bitcoin have long shown two completely different trends compared to traditional financial markets

Bitcoin has long exhibited two contrasting price trends compared to traditional financial markets, driven by distinct narratives.

During periods of high market sentiment and increased risk appetite, Bitcoin tends to move in tandem with U.S. stocks, displaying a high positive correlation. This is largely attributed to the participation of institutional investors, whose capital flow patterns align with other high-risk assets.

However, during times of market panic or the occurrence of risk events, Bitcoin often decouples from U.S. stock trends and may even show negative correlation, especially when investors lose confidence in the traditional financial system.

This dual narrative poses a unique challenge in defining Bitcoin's role—is it a part of risk assets or a potential safe-haven asset? Which narrative will prevail, particularly in the current scenario with Trump's presidency?

Price Correlation: More "Safe-Haven" than U.S. Treasuries

According to TradingView statistics, over the past decade, the correlation between Bitcoin and the S&P 500 index has been 0.17, lower than other alternative assets.

For instance, the correlation between the S&P Goldman Sachs Commodity Index and the S&P 500 during the same period was 0.42. While Bitcoin's correlation with the stock market has historically been low, this correlation has increased in recent years. In the past five years, its correlation has risen to 0.41.

However, given Bitcoin's strong volatility, this correlation data may not be fully reliable: the relationship between Bitcoin and the S&P 500 showed a negative correlation of -0.76 on November 11, 2023 (around the FTX incident), but by January 2024, it had reached a positive correlation of 0.57.

In contrast, the S&P 500 has performed relatively steadily, with an annual return rate of about 9% to 10%, serving as a benchmark for the U.S. economy. Although the overall return rate of the S&P 500 may be lower than that of Bitcoin, it excels in stability and lower volatility.

Logarithmic comparison of Bitcoin and the Nasdaq index. Source: FRED

It can be observed that during macro hot events, the two usually exhibit strong correlation: for example, during the market recovery after the COVID-19 pandemic in 2020, both showed significant upward trends. This may reflect an increased demand for risk assets against the backdrop of loose monetary policy.

However, during other periods (such as 2022), the trends of Bitcoin and the Nasdaq diverged significantly, showing a weakening correlation, especially during periods of black swan events specific to the crypto market, where Bitcoin experienced unilateral crashes.

Of course, in terms of periodic returns, Bitcoin can easily outperform the Nasdaq by a wide margin. However, purely from the perspective of price correlation data, the correlation between the two is indeed increasing.

A report released by WisdomTree also highlighted a similar observation, stating that although the correlation between Bitcoin and U.S. stocks is not high in absolute terms, recently this correlation is lower than the return correlation between the S&P 500 index and U.S. Treasuries.

Trillions of dollars in assets globally use the S&P 500 index as a benchmark or attempt to track its performance, making it one of the most closely watched indices in the world. If an asset can be found that has a -1.0 (completely inverse) and relatively stable correlation with the S&P 500 index, it would be highly sought after. This characteristic means that when the S&P 500 index performs negatively, this asset could potentially provide positive returns, demonstrating hedging characteristics.

Although stocks are generally considered risk assets, U.S. Treasuries are viewed by many as closer to "risk-free" assets. The U.S. government can fulfill its debt obligations by printing money, although the market value of U.S. Treasuries, especially long-term ones, may still fluctuate.

A significant discussion point for 2024 is that the correlation coefficient between the S&P 500 index and U.S. Treasuries is approaching 1.0 (positive correlation 1.0). This means that both asset classes may rise or fall simultaneously during the same period.

The simultaneous rise or fall of assets is contrary to the original intention of hedging. This phenomenon is similar to 2022, when both stocks and bonds recorded negative returns, contradicting many investors' expectations of risk diversification.

Currently, Bitcoin does not show strong hedging capabilities against the return rate of the S&P 500 index. From the data, the correlation between Bitcoin and the S&P 500 index is not significant. However, recently, the