Correlation Between Bitcoin and SP 500

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Can any of the company-specific risk be diversified away by investing in both Bitcoin and SP 500 at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Bitcoin and SP 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Bitcoin and SP 500 Index, you can compare the effects of market volatilities on Bitcoin and SP 500 and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Bitcoin with a short position of SP 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bitcoin and SP 500.

Diversification Opportunities for Bitcoin and SP 500

0.94
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Bitcoin and SPXKX is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Bitcoin and SP 500 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP 500 Index and Bitcoin is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Bitcoin are associated (or correlated) with SP 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP 500 Index has no effect on the direction of Bitcoin i.e., Bitcoin and SP 500 go up and down completely randomly.

Pair Corralation between Bitcoin and SP 500

Assuming the 90 days trading horizon Bitcoin is expected to generate 4.01 times more return on investment than SP 500. However, Bitcoin is 4.01 times more volatile than SP 500 Index. It trades about 0.06 of its potential returns per unit of risk. SP 500 Index is currently generating about 0.04 per unit of risk. If you would invest  928,857  in Bitcoin on March 31, 2022 and sell it today you would earn a total of  1,098,281  from holding Bitcoin or generate 118.24% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy96.88%
ValuesDaily Returns

Bitcoin  vs.  SP 500 Index

 Performance (%) 
      Timeline 
Bitcoin 
Bitcoin Performance
0 of 100
Over the last 90 days Bitcoin has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Crypto's basic indicators remain somewhat strong which may send shares a bit higher in July 2022. The current disturbance may also be a sign of long term up-swing for Bitcoin investors.

Bitcoin Price Channel

SP 500 Index 
SPXKX Performance
0 of 100
Over the last 90 days SP 500 Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward-looking signals remain fairly strong which may send shares a bit higher in July 2022. The current disturbance may also be a sign of long term up-swing for the fund investors.

SPXKX Price Channel

Bitcoin and SP 500 Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with Bitcoin and SP 500

The main advantage of trading using opposite Bitcoin and SP 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bitcoin position performs unexpectedly, SP 500 can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in SP 500 will offset losses from the drop in SP 500's long position.
The idea behind Bitcoin and SP 500 Index pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

SP 500 Index

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against SP 500 as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. SP 500's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, SP 500's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to SP 500 Index.
Check out your portfolio center. Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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