2 - 4 minute read
For traders looking to gain insight into the potential direction of the S&P 500, bitcoin may be a useful indicator to consider. Research by Delphi Digital has shown that bitcoin tends to lead major stock market bottoms by at least six weeks. This article will discuss the relationship between bitcoin and the S&P 500, the perceived riskiness of cryptocurrencies compared to stocks, and the past performance of bitcoin as a leading indicator for the S&P 500.
Bitcoin as a Leading Indicator for S&P 500 According to analysis of past data by Delphi Digital, bitcoin has a history of serving as a leading indicator for the S&P 500. “History shows that, on average, BTC has topped ~48 days and bottomed ~10 days before the SPX [S&P 500],” Delphi’s strategists wrote in a 2023 preview. “Over the past five years, all major price reversals in BTC have preceded those in major equity indices.” This suggests that traders looking for hints of a potential trend change in the stock market should pay attention to bitcoin.
Cryptocurrencies vs. Stocks One reason for bitcoin’s ability to serve as a leading indicator may be due to its perceived riskiness compared to stocks. While corporate fundamentals and macroeconomic factors directly impact stocks, the crypto market has not yet developed strong links to the global economy. Valuations in the crypto market are largely dependent on the pace of expansion in fiat currency supply and factors like inflation rate that influence Federal Reserve policy. As Brookings Institution’s Eswar Prasad noted last year, bitcoin has become a speculative investment. In comparison, stocks are generally seen as less risky assets.
Past Performance of Bitcoin and S&P 500 Delphi Digital’s analysis shows that bitcoin has tended to top out around 48 days before the S&P 500 and bottom out around 10 days before the S&P 500. For example, bitcoin peaked at $69,000 on November 11, 2021, or 55 days before the S&P 500 topped out at 4,818 on January 4, 2022. The S&P 500’s early 2018 top came 42 days after bitcoin’s bull run ended near $20,000. On the other hand, bitcoin bottomed out 11 days and eight days before the S&P 500 did on March 23, 2020, and December 24, 2018, respectively.
Conclusion Traders should consider keeping an eye on bitcoin as a potential indicator for the direction of the S&P 500. While bitcoin is influenced by macroeconomic factors, it has a history of reacting quickly to changing market conditions and may serve as an early warning system for stock market trends. Past data shows that bitcoin tends to lead major stock market bottoms by at least six weeks, with the cryptocurrency tending to top out around 48 days before the S&P 500 and bottom out around 10 days before the S&P 500.