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Hedging stocks using Cryptocurrencies – Correlation between Stocks and Cryptocurrencies

Correlation between Stocks and Cryptocurrencies – Can Cryptocurrencies be used to hedge stock marker? lets find out

The Intriguing Dynamics Between Cryptocurrencies, Stocks, and Traditional Markets

In today’s financial landscape, one of the most compelling discussions revolves around cryptocurrencies and how they interact with traditional markets and stocks. In an attempt to demystify these relationships, we delve into the world of cryptocurrencies, crypto stocks, ETFs, and various financial markets to understand how these dimensions coalesce or diverge from one another.

We kick off our exploration with a look at popular cryptocurrencies including Bitcoin, Ethereum, Dogecoin, Litecoin, Polkadot, Solana, and Bitcoin Cash. These particular cryptocurrencies are selected due to their availability for trade and overall market interest. Additionally, our investigation integrates the Euro and the UUP (a dollar-based ETF) to gauge any correlations between cryptocurrencies and these significant currencies.

Our findings reveal a slight negative correlation between cryptocurrencies and the U.S. dollar. Interestingly, a stronger positive correlation is observed between cryptocurrencies and the Euro. This contrast of correlations allows for intriguing insights into the influence of different currencies on crypto.

Next, we turn our focus to major indices such as SPY, QQQ, IWM, and DIA, alongside gold, silver, and bonds. Our findings highlight a lack of correlation between these traditional markets and cryptocurrencies. Despite common narratives, Bitcoin and gold do not always move in tandem as a “flight to quality.”

The comparison extends to the banking sector and semiconductors, where again, no strong correlation is observed. The one consistent element across the cryptocurrency board is that all cryptocurrencies tend to move in the same direction. This is critical for investors to consider: being long on Litecoin or Bitcoin Cash often signifies being long on Bitcoin.

The following exploration moves beyond cryptocurrencies to their relationship with stocks, especially those closely associated with the crypto space. Companies like Coinbase, MicroStrategy, Riot Blockchain, and Marathon Patent Group showcase high correlation with the crypto world. We also evaluated other tech-related companies, such as PayPal, Square, Nvidia, AMD, Tesla, Microsoft, and Apple, but found minimal correlation to the crypto world.

In particular, Coinbase’s correlation with Bitcoin reveals intriguing insights. Despite its business model, Coinbase’s correlation with Bitcoin is weaker than with other stocks closely tied to the crypto space, such as MicroStrategy, Riot Blockchain, and Marathon Patent Group.

To wrap up our analysis, we look at the percentage returns since the market peak in early January 2022. It is evident that Bitcoin has experienced significant drawdowns, with Coinbase illustrating an even higher beta and bigger drawdowns. While the NASDAQ and E-minis have also been weak during this period, the overall moves in the market have not mirrored the magnitude of fluctuations seen in cryptocurrencies and related stocks.

The key takeaway from this comprehensive analysis is that while day-to-day price action in the crypto space and related stocks may seem similar, the magnitudes of these movements can vary significantly. Understanding these unique dynamics can be instrumental for investors navigating the volatile landscape of cryptocurrencies, associated stocks, and traditional markets.