Economic instability and cryptocurrencies: a "safe haven" or an illusion?

Before 2018, cryptocurrency was an "island" where investors sought refuge from global economic disasters. However, this ceased to make sense later, as the crypto market began to mirror the movements of the stock market, mainly due to the growing popularity of digital assets.

From isolation to synchronization with the stock market

In the early stages of crypto market development, the connection between digital assets like Bitcoin (BTC) and Ethereum (ETH) and traditional assets such as stock indexes was very weak. For example, according to a 2021 Fidelity Investments study, from 2016 to 2019, the Pearson correlation coefficient between Bitcoin and the S&P 500 index was only 0.12. This indicates that their price dynamics were very different.

At that time, cryptocurrencies were considered a tool for diversifying stock market investor portfolios: while stocks were falling, Bitcoin and other major cryptocurrencies were showing an upward trend.

However, already in 2018, experts observed that the correlation between cryptocurrencies and traditional assets began to increase, especially during times of economic instability.

Analysts believe the primary catalyst for these changes was the 2020 pandemic: in March, the crypto market crashed alongside stock indices. This was because amid the anticipated crisis, people massively withdrew funds from high-risk assets into cash and cashless forms.

On March 12, 2020, the Nasdaq stock index fell by more than 9%, and Bitcoin followed — collapsing by nearly 37%. This day was dubbed "Black Thursday." Later, amid interest rate cuts by the U.S. Federal Reserve (Fed) to support the economy, returns from savings bank products such as deposits collapsed.

As a result, investors once again became willing to take on more risk, leading to increased purchases of volatile assets. This caused both stock and cryptocurrency prices to resume growth.

By May 2020, Bitcoin had returned to its pre-crash March levels — the same occurred with Nasdaq and S&P 500 indexes, once again confirming the increasing correlation between these assets.

The story didn't end with the pandemic: the level of correlation continued to rise, and by the end of 2021, according to Bloomberg Intelligence, it had increased to 0.45. In other words, the correlation between Bitcoin and the S&P 500 more than tripled in just two years.

Over the same period, according to CoinShares, the volume of institutional investments in cryptocurrencies grew more than 30-fold: from $3 billion in 2019 to $93 billion in 2021. Moreover, interest from major companies such as PayPal, Strategy, and Tesla further amplified the effect and led to the integration of cryptocurrencies into traditional financial systems.

The next turning point was the 2022 crisis, triggered by the highest inflation levels in decades and rate hikes by the U.S. Fed. Amid investor fears of a possible recession, Bitcoin and the Nasdaq stock index both dropped by 25% in March 2022.

At the same time, according to Glassnode for Q2 2022, the correlation between Bitcoin and the S&P 500 reached a record high of 0.73. This was almost double the correlation between the index and gold, which stood at just 0.38.

Another example was the economic crisis in March 2023, caused by the collapse of the central U.S. bank Silicon Valley Bank. The crypto market declined along with stocks, with assets losing more than 30% of their value. The correlation between BTC and the S&P 500 was over 0.50.

In comparison, during the same period, the correlation between the leading cryptocurrency and gold was only 0.15. It had decreased by 0.06 since 2022.

Experts note that some other cryptocurrencies maintain a high level of correlation with traditional assets even during stable periods. For example, the Pearson correlation between leading altcoin ETH and the Nasdaq index has remained above 0.6 since 2023 under various market conditions. Ironically, Ethereum, the second-largest cryptocurrency by market cap, has earned the label of "digital stocks."

Has Bitcoin retained Its "safe-haven" status?

Experts still believe that Bitcoin retains its reputation as "digital gold" and a hedge against inflation — but only partially. According to Bloomberg data for 2024, investment in crypto funds exceeded inflows into gold ETFs by approximately 2.3 times.

However, during periods of high volatility (such as economic recessions), cryptocurrencies and gold often show inverse correlation. This means their prices move in nearly opposite directions.

Experts have identified four main reasons why cryptocurrencies have become more correlated with the stock market:

1. Strong institutional influence

According to CoinDesk, by 2023, almost 87% of Bitcoin's trading volume came from institutional investors. Amid Fed rate hikes, liquidity in both stock and crypto markets declines.

This happens because institutional investors, in response to rising interest rates, withdraw funds from high-risk assets like stocks and cryptocurrencies. For example, in 2022, the Fed's $1 trillion balance sheet reduction led to a 68% drop in BTC.

2. Rise of "speculative investments"

In 2020, the share of speculative (exchange-transferred) tokens was just 12%, but by 2023 it had nearly tripled — reaching 34%. This indicates that during any crisis, investors massively offload cryptocurrencies, just like they do with stocks.

3. Increasing regulatory pressure

The growing popularity of cryptocurrencies has forced regulators to develop regulatory frameworks more actively. Various regulatory actions can lead to either surges or crashes in the crypto market. According to analysts, over 65% of Bitcoin crashes in 2023 were in some way related to regulatory actions.

Moreover, in 2024, Bitcoin's correlation with CoinDesk's regulatory risk index reached a record 0.78.

4. Integration with TradFi

The final milestone that solidified the high correlation between cryptocurrencies and traditional assets was the activity of major players bridging crypto and traditional finance (TradFi).

This includes the launch of Bitcoin ETFs and Ethereum ETFs in 2024, as well as the development of the real-world assets (RWA) sector, which has attracted the interest of giants like BlackRock, Franklin Templeton, and JPMorgan.

What's Next?

According to JPMorgan analysts, the crypto market will only become a true "haven" for investors when it stops depending on dollar liquidity. This is expected to happen no earlier than 2027, when CBDCs replace fiat currencies.

Analysts also note that suitable conditions for Bitcoin to thrive as a savings asset could be hyperinflation, weakening of the U.S. dollar as a reserve currency, or a default.

Furthermore, analysts predict that the correlation level between cryptocurrencies and traditional assets could decrease by 20–30% due to the growth of "non-correlated" sectors, such as decentralized physical infrastructure networks (DePIN) and artificial intelligence (AI).