The spread of COVID-19 around the globe has put the spotlight on sovereign currencies and the ability of central banks to manipulate these values. After tumbling to 4,000 against the US dollar in March of 2020, bitcoin has rebounded nearly threefold and is poised to test higher levels. The spread of COVID-19 has eroded US growth, undermining the value of the greenback, and has led many investors to the potential safe-haven status of bitcoin.
Why Has Bitcoin Increased Relative to the Greenback?
Bitcoin has increased nearly threefold since hitting a low of 4,000 in March. The initial leg lower was due to a rally in the dollar and a sell-off of riskier assets. While bitcoin, in general, is considered an alternative asset, it moved in tandem with riskier assets such as stocks during the COVID-19 crisis. As economic growth contracted around the globe, the selloff in stocks, commodities, and cryptocurrencies let most riskier assets lower.
The strength in the US dollar did not hold up as the Federal Reserve immediately cut interest rates to zero, and instituted a bond purchase program. The bond purchase program has continued to change since March. Initially, the program focused on treasury securities but has since changed to include corporate ETFs as well as individual corporate bonds.
The Fed’s bond purchase program in conjunction with cutting short-term interest rates to zero has pushed the yield differential in favor of the Euro, the Yen, and the Pound. The trajectory of US yields has weighed on the greenback, which has helped bitcoin gain traction. Additionally, the lack of US growth and the continual spread of COVID-19 throughout the United States has led many investors to find an alternative to assets in US dollars.
Bitcoin Has Increased in Tandem with Riskier Assets
Bitcoin has been highly correlated with US stock price in 2020, despite being considered an alternative asset. Generally, alternative assets such as cryptocurrencies beat to their own drum and are uncorrelated with other assets. Correlation is a statistical study that describes if two or more assets move in tandem with one another. When two assets are move in lockstep with one another the correlation is perfect and the correlation coefficient is 1. If the two assets move in opposite directions they are considered uncorrelated and their correlation coefficient is -1. You can see from the chart that shows the correlation between the bitcoin and the S&P 500 index that the correlation between bitcoin and the US benchmark equity index is highly correlated averaging near 86% during most of 2020.
This means that 86% of the movement in bitcoin can be related to the US stock market.
The Bottom Line
The upshot is that COVID-19 has had a profound impact on the movement of bitcoin. The spread of COVID-19 has contracted global growth which has lead to the rapid decline in US interest rates. This phenomenon has had led to the decline in the US dollar, as well as a sharp rally in the S&P 500 index which is close to an all-time high.
The decline in the US dollar has eroded confidence in the greenback and has led investors to find an alternative such as bitcoin. Additionally, bitcoin is also quoted in US dollars, and the decline in the dollar will lead to a rally in bitcoin. The movement of bitcoin through most of 2020 can also be attributed to the movement in US stock prices. The drop in US interest rates to zero, and the bond purchase program that the Fed has installed has led to a rebound in stock prices. Bitcoin has been highly correlated to the S&P 500 index, and as investors are forced into riskier assets by the Fed, bitcoin has benefited and rallied in tandem.