Latest / The Cryptocurrency Economy with Fexingo: Bitcoin, Ethereum, and Digital Money Markets / Why Crypto Correlated with Stocks Hit a Three-Year Low
Transcript
- Lucas: Bitcoin and the S&P 500 have drifted apart in a way we haven't seen in years. The 30-day rolling correlation between Bitcoin and the S&P 500 just hit 0.2 — that's the lowest reading since mid-2023. Luna: 0.2 is essentially no correlation. Back in 2024, that number was above 0.6. So we've gone from crypto moving in lockstep with stocks to barely moving together at all. Lucas: Exactly. And this isn't just Bitcoin — Ethereum's correlation with the S&P 500 is even lower, around 0.15. Meanwhile, the Fed is sitting at 3.63 percent on the effective rate, and Dallas Fed President Logan just called for 'modestly' higher rates. Normally, that kind of hawkish talk would drag crypto down with equities, but that's not what we're seeing. Luna: So what changed? Is this purely a crypto-native story, or are there bigger macro forces at play? Lucas: I think it's a bit of both, honestly. If walking through the economy with us has made something click, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. It's a small thing that keeps us independent. Luna: Yeah, and we really appreciate that. It means we can keep drilling into data like this without any noise. Lucas: Alright, back to the decoupling. Let's start with institutional flows. The Bitcoin ETFs launched in January 2024, and they've fundamentally changed who owns Bitcoin. As of this week, the ETFs hold over 950,000 Bitcoin. That's about 4.5 percent of the total supply. And those ETF holders tend to have a longer time horizon than the retail traders who dominated before. Luna: So you're saying the investor base has shifted from momentum-driven retail to more strategic institutional money. That alone would reduce correlation with daily stock moves. Lucas: Right. But there's also a flow dynamic. When the S&P 500 drops, some institutional investors rebalance by selling Bitcoin ETFs to buy equities at a discount. That should increase correlation. But what we're seeing is the opposite — correlation falling. So something else is going on. Luna: Maybe the narrative around Bitcoin as a hedge is actually gaining traction? I mean, with rates stuck at 3.63 and inflation still above target, people might be looking for non-sovereign stores of value. Lucas: That's part of it. But let me throw a specific number at you: the VIX, which measures stock market volatility, has averaged around 18 this quarter. Meanwhile, Bitcoin's 30-day volatility has dropped to around 35 percent annualized — that's low by crypto standards but still double the S&P 500. When both are volatile, correlation tends to rise. But now stocks are calm and crypto is calmer than usual. That's a recipe for low correlation. Luna: Interesting. So the decoupling might be more about volatility regimes than about any fundamental change in the relationship. But that raises a question: if correlation is low because volatility is low, what happens when volatility spikes again? Lucas: That's the million-dollar question. Historically, correlations go up during market stress — everything gets sold. But there's some evidence from the past two years that crypto might not re-correlate as tightly as before. For example, during the regional banking crisis in early 2023, Bitcoin actually rallied while stocks fell. And that was pre etf. Luna: Right, because people saw Bitcoin as a way to opt out of the traditional banking system. That's a crypto-specific driver that doesn't depend on the S&P 500. Lucas: Exactly. And that's the bull case for decoupling being structural. But the bear case is that low correlation is mostly a function of low volatility in both markets, and if we get a macro shock — say, rates go to 4 percent or higher — both will sell off together. Luna: Let's talk about what this means for portfolio construction. If correlation is truly low, then adding a small allocation to Bitcoin could improve risk-adjusted returns. But if it's just a temporary lull, you might get burned. Lucas: I've seen research from BlackRock's crypto team that suggests a 1 to 3 percent allocation to Bitcoin improved the Sharpe ratio of a 60-40 portfolio over the past five years, even with the drawdowns. But that analysis assumes correlation stays around 0.3 or lower. If correlation jumps back to 0.6, the benefit largely disappears. Luna: So what's your take? Is this decoupling for real? Lucas: I think it's partially real but fragile. The ETF flows have created a more diverse holder base, and that probably reduces correlation at the margin. On the other hand, crypto is still a risk asset, and the macro environment is the tide that lifts or lowers all boats. My hunch is that we'll see correlation drift between 0.2 and 0.4 for the next few quarters, but a recession or a credit event could push it back above 0.6 quickly. Luna: And that's probably the smart way to think about it — not as a binary decoupled or not, but as a conditional relationship that changes with macro volatility. So for listeners, don't assume crypto is a hedge just because correlation is low today. Lucas: Right. And if you're using crypto in your portfolio, stress-test it under different correlation scenarios. That's where the real risk management happens. Luna: Alright, let's zoom out a bit. What other crypto-specific factors could keep correlation low even if volatility picks up? Lucas: One is the growing use of Bitcoin as collateral in decentralized finance. As of June, over $5 billion in Bitcoin is being used as collateral on platforms like Aave and Compound. That creates a crypto-native demand for Bitcoin that doesn't depend on equity markets. If the S&P drops, that collateral demand doesn't necessarily disappear. Luna: That's a good point. So Bitcoin is becoming more integrated into the crypto economy itself, which gives it its own gravity. But what about Ethereum? Its correlation is even lower — why? Lucas: Ethereum has its own narrative drivers: staking yields, the Merge's impact on supply, and the growing layer 2 ecosystem. Those are all orthogonal to stocks. When the SEC approved Ethereum ETFs in May 2024, that created a separate institutional pipeline. Plus, Ethereum's staking yield is around 3.2 percent right now, which is competitive with the ten-year Treasury at 4.1 percent. That yield attracts income-oriented investors who aren't just speculating. Luna: So Ethereum is almost becoming a yield-bearing asset, which is a different category from stocks. That could structurally lower correlation. Lucas: Exactly. And then you have Solana, which has correlation with the S&P 500 of around 0.35 — higher than Ethereum but still way below 2024 levels. But Solana's price has been weaker, down about 3.6 percent in the past five days. So its correlation story is more mixed. Luna: Let's bring it back to the listener. If someone is building a portfolio today, what should they do with this correlation data? Lucas: First, don't assume the decoupling is permanent. Use it as a reason to rebalance, not to go all-in. Second, watch the VIX. If stock volatility spikes, expect correlation to rise. Third, consider a small allocation — maybe 1 to 2 percent — if you have a long time horizon and can stomach the volatility. But don't rely on crypto as your only hedge. Bonds and gold still have their place. Luna: So the bottom line: crypto's decoupling from stocks is real for now, but it's conditional. The smart move is to stay diversified and pay attention to macro. Lucas: Exactly. And if you want to dive deeper, we'll keep following this story. Next time, I want to look at whether the same decoupling is happening in crypto derivatives markets. The open interest data might surprise you. Luna: Looking forward to it. And for now, maybe the key takeaway is that crypto is growing up, but it's not growing out of its risk asset nature entirely. Lucas: Well said. That's it for today. Thanks for listening.