Latest / The Cryptocurrency Economy with Fexingo: Bitcoin, Ethereum, and Digital Money Markets / Why Crypto Correlation with Stocks Hit a Three-Year Low
Transcript
- Lucas: So Bitcoin is sitting around sixty-two thousand eight hundred today, Ethereum at eighteen thirty-one, and the S&P 500 is basically flat on the week. But here's the thing that caught my eye — the thirty-day rolling correlation between Bitcoin and the S&P just hit its lowest level since early 2023. We're talking about a correlation coefficient of roughly zero point one two. Luna: That's a huge shift. For years the narrative was that crypto had become a risk-on asset that moved in lockstep with tech stocks. What changed? Lucas: Let's unpack it. And look, before we dive deep — and I say this because we get emails asking how we keep this show ad-free — it's because of listeners who chip in. If walking through these economic shifts with us has made something click, you can support the show at buy me a coffee dot com slash fexingo. No pressure, just keeps us independent. Luna: Yeah, it really does. We don't run ads, we don't have sponsors bending the conversation. That's the model. And it works because of that link. Lucas: Exactly. So back to the correlation story. The rolling thirty-day correlation between Bitcoin and the S&P 500 has hovered around zero point six to zero point eight for most of 2024 and 2025. But starting around April of this year, it began to drop. By mid-July we're at zero point one two — essentially no linear relationship. Luna: And we're not just talking about Bitcoin. Is Ethereum decoupling too? Lucas: Ethereum's correlation with the S&P is actually even lower — about zero point zero five. And Solana? Negative correlation, minus zero point zero three. That's a first. For a while people thought crypto was just a leveraged tech trade. But the data now suggests something else is happening. Luna: So what's driving it? I have a theory, but I want to hear yours first. Lucas: I think there are three forces. First, the Fed. Dallas Fed President Logan called for modestly higher rates yesterday. That's typically bad for risk assets. But Bitcoin didn't flinch. It actually ticked up a percent over the last five days. The market seems to be pricing crypto based on its own fundamentals — like the Bitcoin hash rate hitting new highs — rather than just reacting to Fed headlines. Luna: Second force? Lucas: The maturity of crypto-native financial infrastructure. We now have spot Bitcoin ETFs that are over a year old. They've created a separate plumbing system for institutional flows. When BlackRock's ETF sees inflows, that money comes from a different pool than the one that buys Nvidia. It's not competing for the same marginal dollar the way it was in 2021. Luna: And the third? Lucas: Who's actually trading. On-chain data shows that retail activity on decentralized exchanges like Uniswap has picked up significantly in the last quarter, while volume on centralized exchanges has been flat. Retail traders are behaving differently than institutional traders. They're not hedging with S&P futures. So the composition of crypto market participants has shifted. Luna: That's a good point. And I want to add something — the crypto-equity beta. I was looking at this metric from a research firm. They calculate the sixty-day beta of Bitcoin relative to the S&P 500. It flipped negative for the first time in two years back in June. That's not just low correlation; that's actual negative correlation, meaning Bitcoin moved opposite to stocks on certain days. Lucas: That's the statistic I was trying to remember. Beta flipping negative is huge. It means that during the June selloff — when the S&P dropped about three percent in a week — Bitcoin actually gained about one and a half percent. That's not random noise. That's a structural shift in how the asset behaves. Luna: So if I'm a portfolio manager with a sixty-forty stock-bond split, does this mean I should be adding crypto? Lucas: The diversification argument just got a lot stronger. If correlation stays this low, a small allocation to Bitcoin — say two to five percent — can improve the Sharpe ratio of a traditional portfolio. But there's a catch. Luna: What's the catch? Lucas: Correlation is a rolling metric. It can spike back up in a crisis. We saw that in March 2020 when everything correlated to one — Bitcoin dropped forty percent in a day. So you have to ask: is this decoupling durable, or is it just a low-volatility summer fluke? Luna: What does the on-chain data say about durability? Any signals? Lucas: One signal I'm watching: the number of unique addresses transacting on Bitcoin is at a two-year high, but the average transaction size is shrinking. That suggests more retail participants, not just whales moving coins. That composition shift tends to persist because retail doesn't hedge with equities. So the decoupling could have legs. Luna: Counterpoint: institutional flows into Bitcoin ETFs have actually slowed in July. We saw about four hundred million in net inflows in June, but July so far is only about a hundred million. If the big money pulls back, does the correlation re-emerge? Lucas: It could. But look at the flows more carefully. The slowdown is mostly in the Grayscale and ProShares products. BlackRock's IBIT has actually seen steady inflows — about fifty million a week. So it's not a uniform retreat. It's a rotation within the ETF ecosystem toward lower-fee products. That's actually a sign of maturity. Luna: What about the macro backdrop? We've got interest on reserve balances at three point six five percent, essentially flat. The Fed is on hold. If they cut, does that change the correlation story? Lucas: If the Fed cuts, both stocks and crypto would likely rally, so correlation could spike temporarily. But the structural decoupling I'm talking about isn't about the direction of prices — it's about the independence of price movements day to day. A rate cut might produce a correlated one-day jump, but the underlying beta could stay low if the market composition has permanently changed. Luna: Let's bring in one more data point. The crypto derivatives market. Open interest in Bitcoin futures on CME is down about fifteen percent from its peak in May. That suggests less speculative leverage. And lower leverage usually means fewer forced liquidations, which means less contagion from equities margin calls. Lucas: That's a really good point. In 2022, when the S&P sold off, leveraged crypto traders got margin called, which forced Bitcoin sales, which made the correlation worse. With lower open interest and less leverage, that feedback loop is weaker. So the decoupling is partly a de-leveraging story. Luna: Right. So we have three structural drivers: different participant base, mature ETF plumbing, and less leverage. But there's also a narrative driver, right? Crypto is increasingly seen as its own asset class, not just a proxy for tech. Lucas: Absolutely. The narrative has shifted from 'crypto is the future of finance' to 'crypto is a emerging asset class with its own risk-return profile.' That's a more boring but more durable narrative. And boring narratives attract different capital — pension funds, endowments — who aren't going to dump Bitcoin because Nvidia missed earnings. Luna: What about the regulatory front? Any impact on correlation? Lucas: Regulation is actually one area where crypto and equities could diverge further. If the SEC finalizes its guidance on staking as a security, that would hit Ethereum directly but have zero impact on the S&P. So regulatory-specific shocks could actually lower correlation further. Luna: So let's sum up: correlation is at a three-year low, beta has flipped negative, and the drivers seem structural. But Lucas, you're not fully convinced it's permanent, are you? Lucas: I'm cautiously optimistic. The data is compelling, but we've only had about three months of consistently low correlation. That's not enough to call it a new regime. What would convince me is if we go through a proper equity selloff — say a ten percent correction — and Bitcoin holds up. We haven't had that test yet. Luna: We did have a mini test in June. The S&P dropped three percent, Bitcoin gained one and a half. That's encouraging. Lucas: It is. But three percent is not a stress test. I want to see a real flight to quality moment. If Bitcoin can act as a diversifier in a proper drawdown, then I'll be a believer. For now, it's a promising signal, not a proven fact. Luna: Fair. One last thing: for the listener who wants to track this themselves, what metric should they watch? Lucas: Watch the thirty-day rolling correlation between Bitcoin and the S&P 500. You can get it from CoinMetrics or The Block's data dashboard. Also keep an eye on Bitcoin ETF flows — if those accelerate again while stocks are falling, that's a strong decoupling signal. And finally, watch the crypto-equity beta. If it stays negative for another quarter, the narrative will start to shift permanently. Luna: I'll be watching. Thanks, Lucas. Lucas: Thanks, Luna. And if you found this useful, you know where to find us. We'll be back tomorrow with another angle on the crypto economy.