Key Points:
- Bitcoin mining has a positive correlation with local stock markets, particularly in the United States.
- As bitcoin mining declines in a region, the correlation between bitcoin and local stock markets subsides.
- The correlation between bitcoin and local stock markets is stronger in regions with higher levels of bitcoin mining.
Crypto is often seen as an uncorrelated asset class, but recent research suggests that it may have a positive correlation with local stock markets, especially in regions where bitcoin mining is concentrated. A study examined the relationship between bitcoin mining activity and the performance of local equity markets, focusing on the United States, China, and their respective stock market indices.
The study used the S&P 500, Hang Seng, and Shanghai Composite indices as proxies for the local equity markets in the United States and China. The researchers calculated the rolling nine-month correlation between bitcoin returns and each of the three indices, using weekly data. They then compared this data with the bitcoin hash rate, which measures the computational power of the bitcoin blockchain and is a proxy for the level of bitcoin mining activity. The analysis covered the period from September 2019 to January 2022.
The findings revealed that there is a positive correlation between bitcoin prices and the performance of the S&P 500 in the United States. As bitcoin mining activity increased in the United States between November 2020 and November 2021, the correlation between bitcoin prices and the S&P 500 also increased. On the other hand, as bitcoin mining activity declined in China during the same period, the correlation between bitcoin prices and the Hang Seng and Shanghai Composite indices in China also decreased.
These results suggest that the more bitcoin is mined in a particular country, the stronger the correlation between bitcoin prices and the local stock market performance. As bitcoin mining activity declines in a region, the correlation between bitcoin and local stock markets also subsides. This indicates that the level of bitcoin mining may affect how bitcoin moves in relation to different stock indices, and consequently, its potential diversification benefits in a portfolio.
The study also examined the annual correlations between bitcoin prices and the indices over different years. Overall, the results supported the hypothesis that the more bitcoin mining activity in a locale, the greater the correlation between bitcoin prices and local stock markets.
It is important to note that these findings are specific to the time period and regions studied and may not necessarily hold true in other contexts. Additionally, correlations do not imply causation, and the relationship between bitcoin prices and stock market performance may be influenced by other factors besides mining activity.
In conclusion, the study provides insights into the relationship between bitcoin mining and local stock market performance. Understanding this relationship can help investors assess the potential diversification benefits of including bitcoin in their portfolios.
