Are S&P 500 And Bitcoin Correlated? The Definitive Answer! - YouTube

I'm Sebastian St James. Are the S&P 500 and  bitcoin correlated? Should you invest in the S&P  

500, or should you invest in bitcoin? Or are you  statistically better off investing in both? And  

can you use bitcoin as an insurance policy against  dips in the S&P 500? I'll let you know. I've  

done original research on this, to discover the  answer this answer is unique and you'll only find  

it here. Bitcoin fell below the psychologically  important threshold of twenty thousand dollars on  

Saturday for the first time since late 2020, in a  fresh sign that the sell-off in crypto currencies  

is deepening. The S&P 500 year-to-date is down  23.1 percent. What are we going to do about this  

crisis? Well traditionally within retirement,  let's use that as an example, they have the  

60/40 portfolio: 60% shares, 40% bonds. Why? Why  do they have this mix? Well the theory is that  

bonds and stocks should not be correlated, right?  So when your stocks, which is your growth engine,  

dives, then your bonds should in fact be going  up. That's the theory anyway. And, therefore,  

it should smooth out your return over time.  And particularly if you're in retirement,  

or approaching retirement, then that sort of  smoothing out can be very important. Is that  

true? Are stocks and bonds actually uncorrelated?  Is it a good idea to have both: a mixture of them?  

Or should you have 100% stocks? I've got a video  coming out on that shortly, so make sure you're  

subscribed so you don't miss out. So some tout  the theory of bonds and stocks being uncorrelated.  

What about bitcoin? Is bitcoin and stocks, the  S&P 500, correlated or uncorrelated? Let's think  

about that. And what does correlated mean anyway?  Correlated means having a mutual connection. So as  

the price of A goes up, the price of B goes up as  well. And they fall together. They rise and fall,  

not exactly, but closely in sync over time. Now,  that can lead to some problems and some benefits.  

And I'll tell you about them. Bitcoin and the S&P  500 will either be one of three things. They'll  

either be correlated, which means they rise and  fall together. They will be inversely correlated,  

which means as one goes up the other one  automatically goes down by the same amount.  

Or they could be unrelated at all. So one goes  up the other one stays still for example. Each  

of these has some benefits and some disadvantages.  If they're not correlated, if they're inversely  

correlated, then they can act as smoothing,  as we've discussed with the alleged stocks and  

bonds. If they're not correlated at all, then it's  not so much a smoothing function but it does mean  

you're having assets which won't be affected  by the same conditions. So if the market is  

in crisis for stocks, and the market isn't in  crisis for bitcoin, then owning both can make  

sense. But only if that's true. On the other hand,  if they're closely correlated then, well, why own  

both? Because if they're both going to fall and  rise together, well pick your favorite one, and  

invest in that. So we know what correlation means:  rising and falling in sync. But statistically,  

correlation is actually measurable. Between plus  one and minus one, with zero being in the middle.  

So if correlation is perfectly correlated,  meaning they rise and fall together, you will  

get the answer of one. If they're not correlated  at all, you'll get zero. Inversely correlated,  

meaning one goes up the other one goes  down, you'll get minus one. Let's take a few  

examples. Watching Netflix versus a lightning  strike. Correlated or uncorrelated? Hopefully  

uncorrelated. If it's correlated in your,  case you've got big problems. That would be  

a correlation of zero. You watching Netflix and  you eating snacks. Correlated or uncorrelated?  

Correlated. Let's say, a correlation of 0.85. What  does that mean? It means well mostly you don't eat  

snacks every time you watch Netflix - well maybe  you do - but if we say 0.85, it means mostly you  

do but not always. You watching Netflix versus you  watching YouTube. A correlation of -1. Why? Well  

if you're watching Netflix, then you don't have  time at that point in time, to watch Netflix.  

So you're watching one or the other. Therefore,  they are inversely correlated. A correlation of  

minus one. Let's have a look at the three outcomes  for the S&P 500 versus bitcoin. If the correlation  

works out to be minus one, that is good. If it  works out to be zero, that could be good as well.  

But one is bad. And we don't want one. I  have personally collected all the data from  

both bitcoin and the S&P 500, from the 19th of  June 2017, right up to the 19th of June 2022.  

So right up to now. I've got the last five years  worth of raw data, and I'm not afraid to use it.  

Here is the raw data in a spreadsheet. In the  second column we have the S&P 500 closing price.  

And the bitcoin is beside that closing price.  And as we go down and down and down throughout  

the different dates, through all five years.  All the raw data is there. There is a slight  

wrinkle that I've corrected for. The S&P 500, the  share market, is only open for five days a week.  

Bitcoin trades seven. So what I've done is  I've taken the five days from the S&P 500,  

looked up the dates, the prices for the dates  from bitcoin, and have matched them on those five  

days a week. So we've sorted that out. Let's pop  them beside each other, and see if we can figure  

out whether they're correlated or not. And here is  the chart. Oh! In orange, we see bitcoin. In blue,  

we see the S&P 500. But it's just a big, thick  line down the bottom! That doesn't help me! What  

has gone wrong? What has failed? The answer is the  scale is all off. We've just plotted the data raw.  

But that doesn't make good for good graphing. Fear  not. I will fix that. So I've done the data again.  

This time, I've looked at the maximum and the  minimum of the S&P 500 throughout that period.  

The maximum and minimum of bitcoin throughout  that period. That is zero. That is a hundred  

percent. And we've remapped all the numbers, so  it falls within that range. Now we're comparing  

range against range. And so the actual, absolute  values, no longer matter. And we can compare  

them. Can I show that in graph form? Yes I can.  I've rescaled the numbers. I've plotted them  

together. And here, let's have a look. Once again  in orange, it is bitcoin. The S&P 500 is in blue.  

And you can see, yeah, they are rising  and falling. On the right hand side,  

they're both going up together. On the left  hand side, they're both meandering fairly flat.  

From the graph, can I tell exactly how correlated  they are? No. Visually I can see they're fairly  

correlated. So what is the correlation between  the S&P 500 and bitcoin? We've got the raw data.  

We can pop in a spreadsheet function, that will  actually do the math for us, and tell us exactly  

how correlated they are. Remember, minus  one is good. Zero is good. One is bad. Or  

anything close to one is bad. The answer of  how correlated the S&P 500 versus bitcoin is  

0.913354452577812. In other words, 91 percent!  Oh! Bitcoin and the S&P 500, are highly correlated  

together. This was the worst possible outcome.  Zero was okay. Minus one okay. Anything close to  

one is basically causing us problems, and problems  we have. So what we've discovered is that bitcoin  

does not perform the function of insurance.  So when something goes wrong with the S&P 500,  

owning bitcoin does not help! Why well that would  be a correlation of -1. It doesn't have that.  

Also owning both assets to give you variety,  does not help, because that would be correlation  

of zero. They'll be uncorrelated. And they  are 91 percent correlated. So why is bitcoin  

and the S&P 500 possibly correlated? Why? Well  they both work on the same drivers. They are  

fear and greed, supply and demand. It's  affecting both markets at exactly the same time.  

Largely because you've got the same investor  group. No. Not all people who invest in shares  

invest in bitcoin. But enough of them do.  And the fear response and the greed response,  

are triggering both groups at the same time. So if  they're not uncorrelated, and, therefore, owning  

both assets really doesn't make sense, which asset  is better. Is bitcoin better? Is S&P 500? Tell  

me. Which one has performed best over time? Can  you give me the data? Yes I can. In graph form.  

Year to date, here is the graphs. We have the  S&P 500 in red, and in blue we have bitcoin. And,  

oh! Well, you can see they've both gone down.  Bitcoin's in a bit of a crash at minus 70.23  

percent. The S&P 500 is down minus twelve point  twenty percent. So far, winner: S&P 500. Let's go  

further. If we take an entire year, we find that  bitcoin has, in fact, outperformed the S&P 500.  

59% for bitcoin, and 5% for the S&P 500. So over  12 months, winner: bitcoin. Over two year period,  

we find that, well, S&P 500 has almost flatlined  relative to bitcoin. Bitcoin has rushed all the  

way up, up. Oh. Bit of a dip. Basically two  camel humps, and then down, down, down, down,  

down. 93% over two year period. That's 93%  in total. Not 93% annualized. And the S&P 500  

has grown a respectable 18% over two years. But  not as impressive as 93. I can go further. Five  

years. Well, bitcoin has done amazingly well over  that period. 593 percent versus the S&P 500s 50%.  

So why has bitcoin outperformed the S&P 500  over these five year period? Well it's novelty,  

basically. Bitcoin is the new kid on the  block. People have jumped on the hype wagon,  

and followed it all the way up to the top. And  now it's crashing and coming all the way down.  

But that's basically why it's outperformed.  Just because it's new, and it's been hyped.  

So what can I tell about the future between these  two? Well if we look at the graphs individually,  

this is what we see. If we look at the S&P  500, we notice that the graph is actually  

going all the way up to the right. Sure it's  come down a bit. But the trajectory, overall,  

seems to be in growth mode. If we look at  bitcoin, on the other hand, it was flat,  

flat, flat. Massive hype and jump there. A bit  of a camel's hump. And now it's going down, down,  

down. That graph alone, does not inspire me  with confidence. It doesn't have the smoothness.  

It doesn't have the onward trajectory upward, that  I'm noticing with the S&P 500. So which is better?  

Is the S&P 500 better for you? Or is bitcoin?  They're not actually the same investment class.  

One is a currency and one is speculation. The  other one is ownership in real companies. And it  

depends which direction you want to go, which is  of course up to you. Did you know that a finance  

expert once predicted the downfall of bitcoin?  Oh! That was me. Go ahead and watch the video now.