Comparing Bitcoin and S&P 500: charts and correlation to stocks

When it comes to building a portfolio for the long haul, traders often look towards long-standing, blue-chip stocks and exchange-traded funds tracking the Standard and Poor's 500 (S&P 500). Given their time-tested narrative and popularity among institutions, it's no surprise why such assets are top picks for anyone new to the world of traditional finance (TradFi).

However, we might see a gradual shift away from this norm given how some hedge funds and institutions are championing the notion of making cryptocurrencies part of any portfolio. With Bitcoin going from $16,000 to upwards of $40,000 within a year and outperforming TradFi assets, cryptocurrencies are once again taking center stage as a hot topic in the TradFi industry.

Curious to learn how Bitcoin compares against incumbents like the S&P 500? From looking at Bitcoin versus S&P 500 charts and gauging their year-to-date (YTD) performance, to understanding Bitcoin's correlation to the stock market, here's everything you'll need to know when comparing Bitcoin and the S&P 500.

If you're crypto curious or an experienced crypto veteran, you'll definitely already know what Bitcoin is. Before diving into in-depth comparisons, let's first consider what the S&P 500 is and why it's so popular among traders in the TradFi space.

What is the S&P 500?

Launched in 1957, the S&P 500 is a stock market index tracking the performance of 500 of the largest companies listed on United States stock exchanges. From stocks that we interact with everyday to high-growth tech names, some of its most well-known holdings include Tesla, Microsoft, Visa, Coca-Cola, and McDonald's.

Why is the S&P 500 so popular?

As a bellwether for the US economy, the S&P 500 has been the go-to choice for risk-averse traders looking to hold a position in the long run. This is largely because of its time-tested historical performance and diversification across numerous popular industries. By intending to trade and hold the S&P 500 with a long-term mindset, traders have historically reaped annual gains of close to 10%. Aside from its depth and diversity, the S&P 500 is also a favorite among traders because of its regular rebalancing. From weeding out poor performers to making sure particular industries don't make up the majority of the index, this constant act of rebalancing makes sure the S&P 500 stays diversified without leaning too much towards popular industries like tech.

What are analysts now saying about Bitcoin? The changing BTC narrative

The biggest reason why Bitcoin and other cryptocurrencies are talked about as much today is because TradFi is finally changing its tone towards the legitimacy of crypto. As research analysts publicly announced that including some crypto in your portfolio could be a good idea, we're seeing a vast difference in sentiment compared to 2022, when Bitcoin's reputation was damaged by the collapse of Terra Luna and FTX. Fast forward to today and we're seeing a bullish narrative as even TradFi giants like BlackRock are getting involved in the crypto scene in the form of a BTC spot ETF.

On top of this changing narrative, Bitcoin is also becoming increasingly popular because of its lack of correlation to the state of today's macroeconomy. Given its decentralized nature, Bitcoin may be considered a hedge against the volatility present in TradFi markets now more than ever. To echo the words of BlackRock CEO Larry Fink, traders are treating Bitcoin as a flight to quality amid regional banks collapsing and sovereign countries like Sri Lanka declaring bankruptcy.

Similarities when considering Bitcoin vs S&P 500

Robust performance with loose monetary policy

The one similarity that both Bitcoin and the S&P 500 share is that they excel during periods of loose monetary policy, when central banks aim to stimulate the economy, for example, by lowering interest rates. While we might be aware that stimulus packages and low interest rates lead to more funds flowing into the asset market, it's crucial to understand why this is the case.

During stages of quantitative easing, central banks tend to purchase government bonds, which inject liquidity into the economy. This creates an environment of low interest rates, so businesses and individuals can secure loans while minimizing their cost of borrowing said funds. This was the case during the Covid-19 pandemic, when businesses went out of their way to make big purchases to take advantage of the favorable, near-zero interest rates. This boosted the overall growth that tech companies could achieve, leading to pandemic stocks like Peloton, Zoom, and DocuSign reaching all-time highs as forecasted demand and revenue levels grew by numerous multiples. Ultimately, that's how the S&P 500 managed to recover from its February 2020 dip so quickly as businesses were quick to react to the favorable interest rates and take advantage of the low cost of borrowing.

Similarly, as with the case of Bitcoin, traders also began to inject more funds into the crypto market and speculated rampantly thanks to easy access to funds and stimulus checks issued by the government. This eventually led to Bitcoin reaching an all-time high right before the federal government pulled the plug by raising interest rates.

Easily accessible worldwide

Trading in the stock market today is largely considered convenient and efficient. This is a far cry compared to the past, when phone calls had to be made to brokerages and traders had to wait for dealers to aid traders in the execution of trades and securing the best prices possible. From access to different markets to affordable commission fees, TradFi traders will have no issue trading the S&P 500 index and its related stocks.

While the same might not have been said about Bitcoin a decade ago, crypto traders certainly have an easier time gaining access to Bitcoin these days. Thanks to the prevalence of centralized exchanges, crypto traders can effortlessly deposit their funds and access all sorts of Bitcoin-related trading pairs and derivatives like futures and options. There'll be even more ways for traders to gain exposure to Bitcoin thanks to the possibility of a spot BTC ETF approval on the horizon.

Differences between Bitcoin and S&P 500

Level of diversification

The most obvious difference between Bitcoin and the S&P 500 is that the former is a singular digital asset whereas the latter is an entire index of the top 500 companies listed in the US. While trading Bitcoin gives you 100% exposure to the coin itself, trading the S&P 500 index gives you a market-cap-weighted mix of various stocks, with the top few being Apple, Microsoft, and Amazon. This ultimately makes trading the S&P 500 suitable for risk-averse traders given its relative stability and diversification compared to the singular digital asset that is Bitcoin.

Volatility

When comparing Bitcoin and the S&P 500, a big talking point is the difference in their volatility. To gauge this, we can take a look at the historic performance of both Bitcoin and the S&P 500. Bitcoin's performance is akin to a roller-coaster, as its 2022 performance can be contrasted with its 2023 run. From plunging more than 64% in 2022 to rallying 160% so far in 2023, crypto traders will need to be comfortable with Bitcoin's volatility when trading it. Conversely, the S&P 500 averages about 9% to 10% when considering its annual performance and is far less volatile given that it's a benchmark for the overall performance of the US economy. Despite delivering less in overall returns over the same comparative time period, the S&P 500 is certainly more consistent in the long run when looking at its performance so far and its long track record.

Differing levels of regulation

For anyone unfamiliar with cryptocurrencies, Bitcoin and the crypto scene can certainly seem like the wild west given the regulatory differences when compared to TradFi. While TradFi traders have established regulatory frameworks, such frameworks and authorities are still emerging in the crypto space. Fortunately, centralized exchanges have got the regulation ball rolling by enforcing Know Your Customer (KYC) verification requirements to comply with anti-money laundering standards.

Bitcoin vs S&P 500 chart comparison: are they correlated?

Source: tradingview.com

From the chart above that's accurate as of December 19, 2023, we can observe that both Bitcoin and the S&P 500 index are in a clear uptrend. Curious as to why Bitcoin is correlated to the S&P 500? One reason why this might be the case is the declining inflation numbers and a halting of interest rate hikes by the US Federal Reserve.

In doing so, the Fed created a favorable environment for risk-on trading as both Bitcoin and the S&P 500 index have experienced bull rallies that buck the bearish sentiment caused by the 2022 correction. YTD, Bitcoin has achieved 160% while the S&P 500 has gained 23%. Although some may laud Bitcoin as the winner in this comparison, one simply needs to look to 2022, when BTC crashed 64% while the S&P 500 index suffered a 19% decline in comparison. These annual performances ultimately put Bitcoin and S&P 500 comparisons in perspective as Bitcoin's monstrous gains often come after huge corrections in BTC prices.

Bitcoin's correlation to the stock market: BTC and S&P 500 correlation

Is Bitcoin correlated to the stock market? A quick glance at the charts above suggests they are — but it's not that simple. As previously mentioned, a big reason they both rallied is due to improving macroeconomic conditions. Remove that from the equation, and we can notice big differences in the narratives driving Bitcoin and the S&P 500. Here are some instances where Bitcoin's correlation to the S&P 500 might be called into question.

Bitcoin's inherent volatility

One of the biggest reasons why Bitcoin isn't correlated to the stock market is that the price shocks caused by news surrounding Bitcoin ownership cause larger-than-expected volatility. From Tesla dumping its Bitcoin holdings to MicroStrategy's aggressive Bitcoin holdings strategy, these are all huge catalysts that cause massive shifts in Bitcoin's price. As such, this results in a decoupling from stock market indices like the S&P 500, as the stock market could be rallying or crashing contrary to Bitcoin's price because of the announcement of such news.

S&P 500 against bank runs

In early March 2023, the S&P 500 faced a shocking decline as rising interest rates shook the foundations of many US banks. Due to panic withdrawals from wealthy individuals and institutions, the now-defunct Silvergate Bank, Signature Bank, and Silicon Valley Bank fell victim to bank runs. This led to a distrust of the current banking system and a migration of funds towards cryptocurrencies. For many traders, this was perceived as a hedge against the fiat money system, as the decentralization of crypto meant that funds deposited there were at less risk of being lost. As a result, Bitcoin's popularity grew while the S&P 500 dipped, underlining the lack of correlation between Bitcoin and the stock market.

Including both Bitcoin and the S&P 500 in a well-rounded portfolio

In an in-depth study conducted by Fidelity, it considered the impact of adding a small percentage of Bitcoin to a traditional portfolio consisting of stocks and bonds. It found that traders who added a mere 1% of Bitcoin to their portfolio experienced an increased volatility of about 3%. With the limited data available on Bitcoin, the team concluded that Bitcoin has the potential to enhance overall diversification given its fluctuating correlation with traditional assets. Thus, it'd make sense to consider attributing a portion of a well-rounded portfolio to a diverse asset class like Bitcoin and cryptocurrencies given its ability to act as a potential hedge and its phenomenal returns so far.

However, traders must ultimately maintain strict risk management given the high volatility of Bitcoin as increased portfolio holdings will need to be justified by even higher returns. As such, TradFi traders planning to add Bitcoin to their portfolio must take into account the risks involved and how Bitcoin might shift the entire dynamic of the overall portfolio.

Final words and next steps

When comparing Bitcoin against the S&P 500, it's important to first understand that both Bitcoin and the S&P 500 are popular among many for trading given their high liquidity and wide accessibility. However, the personal choice on which is better to trade depends on your personal risk appetite and time horizon when planning and executing trades.

For seasoned TradFi traders who are comfortable with the nuances and safety guards in place to prevent fraud and scams, the S&P 500 index might be preferred overall. Conversely, if you're a crypto trader who understands the cycles that crypto goes through, has strict risk management, and successful trading strategies, then taking on that risk and riding the volatility of Bitcoin might be more attractive.

Keen to explore more about Bitcoin? Find out why we believe Bitcoin has intrinsic value with our in-depth look. If you're interested in upcoming catalysts, you might want to read about the Bitcoin halving — an event that might be the next bullish catalyst for the crypto market.