In a recent interview with CNBC, Charlie Bilello of Pension Partners outlined the correlation between Bitcoin and the stock market.
Spoiler Alert: There is no correlation!
In 2017, as Bitcoin soared toward 20,000, the stock market put in new highs, seemingly in sympathy with the rise in Bitcoin. In February and March of 2018, the two asset classes definitely moved in the same direction at the same time, but that coincidence did not continue after that.
Backing out the price chart to 2014, you see that there is no correlation between price movement in Bitcoin and price movement in the stock market:
People are susceptible to correlation-causation fallacy, or put simply, mistaking event A as being the cause of event B, because they happened either at the same time or one after another. One example is hats causing baldness in men. People think that hats cause baldness because you always see bald men wearing hats, so that must be the cause, right? Wrong. It just looks that way because bald men commonly cover their baldness by wearing hats. Thus, mistaking hats as the root [ugh, another bad pun] cause of hair loss.
Anyway. Here is why the two do not trade together. The Bitcoin price is largely governed by sentiment and feelings – animal spirits. Stocks move on earnings expectations and underlying company fundamentals, something Bitcoin does not have.
By the same token [get it? TOKEN!] Bitcoin was thought to move in lock step with Gold. That has also shown to be false:
Again, the price of gold and Bitcoin move according to their own respective market forces and do not move together.
Here is the key take away. Just because Bitcoin is not correlated with stocks or gold, does not mean that they can’t move in the same direction by coincidence. Coincidences do happen, thus the simultaneous price moves in February and March.
The mistake to avoid here is trying to connect dots where none exist. The two asset classes did move together for a brief period this year, but looking again at the chart that dates back to 2014, we see there is indeed no connection.
Do not be fooled by randomness, or in this case, random coincidences.
The Bitcoin price is not a predictor of stock market price movement.