January Effect? Bitcoin Tightens Correlation with S&P 500

Bitcoin’s correlation with the S&P 500 has recently increased, meaning that equities might be an area to watch when making price predictions for the number one digital asset

article-image

Blockworks exclusive art by Axel Rangel

share

key takeaways

  • Analysts say January is the key month to watch when trying to predict end-of-year returns
  • If stocks are down in January, “it’s going to be hard for bitcoin to rally,” Nicholas Colas at DataTrek Research told Blockworks

Bitcoin and equities kicked off the second trading day of 2022 higher. Based on recent data, this trend may continue as bitcoin is starting to move more in tandem with the S&P 500.

With January tending to be a key month to gauge how year-end returns might look for equities, cryptocurrency fans should keep an eye on the S&P for clues on how bitcoin could end the year, Nicholas Colas, co-founder of DataTrek Research, said. 

“If stocks are down in January, though, it’s going to be hard for bitcoin to rally,” he said.

Positive momentum for stocks

The S&P 500 ended 2021 26.89% higher. Based on historical data, analysts are mostly calling for another year of positive returns, although perhaps not as high as 2021, according to Tom Essaye, founder of Sevens Report Research. 

“I imagine that stocks can trend higher, but I don’t expect another 27% year in the S&P 500, I don’t think many people do,” said Essaye. “As we sit right now, the fundamentals and momentum are certainly positive for stocks.” 

The past nine times that the S&P 500 has posted annual gains of more than 20% have resulted in a positive finish for the subsequent calendar year, meaning there is a good chance that the index will finish 2022 in the green, Colas said.

Jessica Rabe, DataTrek Research co-founder, says the January effect tends to start early in the month. “The S&P is up during the first 5 days of trading during most years, and generates over double the annual return of years versus when it was negative during the first week of trading,” she wrote in a recent report.

Despite starting Tuesday’s session in the green, the S&P 500 was trading down 0.24% year-to-date as of market close on Jan. 4, 2022. Bitcoin was also down about 4% year-to-date. 

The bitcoin correlation 

The correlation coefficient of bitcoin and the S&P 500 was 0.35 as of Jan. 3, 2022, meaning that the two assets are moving more in sync than typically expected. A coefficient of 1 would mean the assets are moving together, a coefficient of -1 would mean they are moving in opposite directions.

Historically, the correlation between bitcoin and the S&P 500 has fluctuated. Following bitcoin’s 2018 crash, the coefficient dipped as low as -0.22, according to data from CoinMetrics. During the more recent pandemic-induced sell-off of March 2020, the coefficient rose as high as 0.4

The correlation between bitcoin and the S&P 500 has been trending upward since June 2021. 

Bitcoin volatility continues

Bitcoin ended 2020 more than 300% higher. The largest digital currency’s 2021 gains were a more modest 60%. Large swings in annual returns is nothing new for the digital asset. The token closed 2018 more than 72% lower before coming back in 2019 to rally more than 87%. 

“Bitcoin’s volatility? That’s not going away this year,” said Colas. 

The key area to watch is going to be the Federal Reserve, Essaye said. Speculative areas of the market, like crypto and big tech stocks, are likely to feel the pressure of higher interest rates and pullback in federal support, he added.

“For the first time since 2018, we enter the year where the Fed is going to be hiking rates and removing accommodation,” said Essaye. “And what does that do to the markets and to the economy? That’s the million-dollar question for 2022.”


Get the day’s top crypto news and insights delivered to your inbox every evening. Subscribe to Blockworks’ free newsletter now.


Tags

Upcoming Events

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

MON - WED, MARCH 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience:  Attend expert-led panel discussions and fireside chats  Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts   Grow your network […]

recent research

Pyth Cover.jpg

Research

Pyth is a low latency pull-based oracle. In a future that looks increasingly high frequency, with various alt L1s and L2s that have significantly shorter block times than Ethereum, and an explosion of “high-frequency” protocols such as oracle or CLOB perp DEXs, Pyth’s low latency oracle product looks much better positioned to capture a significant amount of market share in comparison to competitors.

article-image

Roughly $65 billion worth of assets remain on Binance after the exchange agreed to pay, forfeit $4.3 billion Tuesday, Nansen data shows

article-image

The HTX exchange has been hit by a security breach, similar to the recent Poloniex hack

article-image

We have the answers for the usual barrage of questions stuffed with preconceived judgments about Web3, crypto and blockchain

article-image

NFT data will be integrated into CoinGecko APIs in second quarter of 2024, having bought Zash for an undisclosed sum

article-image

Binance and its former CEO have pleaded guilty to federal charges of over $4.3 billion

article-image

Comments come as Binance is set to pay and forfeit $4.3 billion to US regulators, while Changpeng Zhao agrees to step down