Crypto Is Becoming More Correlated to Stocks — And It’s Your Fault

The rise of institutional investors in crypto may be to blame for the breakdown in diversification benefits.

Illustration by II

Illustration by II

Digital assets are losing their hedging benefit just as more institutional investors enter the crypto world. In fact, allocators may be the cause.

The correlation between the price of cryptocurrencies and the stock market has increased over time, according to a recent research study from Georgetown University. The study also found that crypto assets followed the market’s lead even more closely during periods of high market volatility, such as the Covid pandemic and Russia’s invasion of Ukraine.

Many individual investors, market watchers, and entrepreneurs have argued that crypto assets are a safe haven given their scarcity and independence from national governments. In recent years, however, cryptocurrencies have been moving in lockstep with stocks and some critics have raised questions about whether the asset class can continue to serve as “digital gold” that protects investors during times of crises. The new study provides additional evidence that debunks the diversification benefit of crypto assets.

The paper’s authors based their findings on a analysis of the correlation between the S&P 500 and the two biggest cryptocurrencies — Bitcoin and Ether — between January 2016 and July 2022. They found that the correlation — which measures the degree to which two financial securities or instruments move together — between Bitcoin and the index was 0.08 between January 2016 and January 2021. But the correlation between the two increased to 0.33 between February 2021 and July 2022, a period of relatively high volatility. The correlation between Ether and the S&P 500 also rose from 0.04 between 2016 and 2021 to 0.38 during the latter period. A correlation of 1 indicates the two instruments move together.

“The recent increase in the correlation coefficient between the crypto asset market and the S&P 500 may reflect the increased participation of institutional investors,” according to the paper.


Bitcoin and Ether have moved even more closely in line with the market when markets are rough — exactly the time when investors need assets to behave differently. When the coronavirus shut down global economies in March 2020, Bitcoin and Ether recorded a correlation with the S&P 500 of 0.47 and 0.5, respectively. At the time, gold only had a 0.04 correlation with the index. From February 2022 to July 2022, as the conflict between Russia and Ukraine escalated, Bitcoin and Ether had correlations of 0.58 and 0.59 with the market, while gold had a correlation of -0.12.

The authors also compared cryptocurrencies with gold during periods of high market volatility and high policy risk. When the VIX index — a popular measure of market volatility — rose above 25, Bitcoin and Ether had a correlation with the S&P 500 of 0.43 and 0.41, respectively, while gold had a near-zero correlation with the market. The same pattern is also reflected during periods when the U.S. Economic Policy Uncertainty Index rose above 300.

“Gold’s propensity as a hedging asset appears to be stronger during stressed periods, such as crypto winter, the Covid-19 shock, and during higher VIX periods,” the authors concluded. “On the other hand, correlations between Bitcoin/Ether and the S&P500 are positive and significant during these periods. This implies that Bitcoin has become neither ‘digital gold’ nor a ‘safe-haven asset’ in times of crisis. Bitcoin may have rather acted as a risk-magnifying factor.”