The connection between Bitcoin and traditional markets
Historically, U.S. presidential elections have significantly influenced the stock market and, by extension, Bitcoin. The S&P 500, a major benchmark for U.S. equities, has displayed a consistent trend of outperforming in the period following elections. This pattern is notably relevant for Australian investors, as the Australian stock market often reflects movements in U.S. markets, and Bitcoin’s correlation with the S&P 500 indicates that BTC might follow similar trends.
Over the years, Bitcoin has exhibited a significant correlation with traditional markets, particularly with the S&P 500. This correlation becomes most apparent during Bitcoin’s bullish phases and when investors adopt a “risk-on” attitude, demonstrating a greater willingness to invest in higher volatility assets, such as stocks and cryptocurrencies. For Australian investors, grasping this correlation is essential, as it implies that Bitcoin’s price fluctuations are frequently swayed by broader market dynamics, particularly those occurring in the U.S.
Even though Bitcoin is frequently promoted as a safeguard against conventional financial systems, its historical price movements have aligned closely with equities, especially during economic uncertainty or widespread market declines. For instance, during the financial crash caused by COVID-19 in March 2020, both Bitcoin and the S&P 500 experienced sharp declines, only to bounce back in the following months as central banks, including the RBA, pumped liquidity into the markets.
Source: bitcoinmagazine.com
Historical market performance after elections
Nonetheless, an increasing number of experts believe that Bitcoin may eventually separate from traditional markets as it continues to evolve. Such a decoupling would indicate that Bitcoin’s value would not be as closely connected to stock performance, enabling it to function more like “digital gold” – a stable store of value independent of equity market variations. However, currently, no definitive evidence supports this decoupling. The correlation persists strongly, and Australian investors should pay attention to both cryptocurrency and traditional markets when making investment choices.
A look back at previous election cycles reveals that the S&P 500 has generally recorded substantial gains in the year post-election. For example, following the 2012 election, the S&P 500 noted an 11% growth year-on-year in November, which escalated to about 32% by the subsequent year. Likewise, after the 2016 election, the index increased by roughly 7% year-on-year, and a year later, it had risen approximately 22%. The trend held for the 2020 election as well, with the S&P 500 growing by 17-18% in November 2020 and reaching close to 29% a year later.
For Australian investors, this historical insight provides a potential guide for anticipating market behavior in the months after the 2024 U.S. presidential election. Should the S&P 500 maintain its pattern of post-election increases, Bitcoin may follow suit, presenting a unique opportunity for those aiming to capitalise on the upcoming bull run. Nevertheless, it’s crucial to acknowledge that while history tends to repeat itself, it does not do so with absolute precision. External influences, including global economic conditions, regulatory changes, and market sentiment, will also play critical roles in determining Bitcoin’s price path.
Interestingly, the trend of post-election outperformance is not merely a recent occurrence. Over the last four decades, only one election year (2000) recorded negative returns in the 12 months following election day, primarily due to the dot-com bubble burst. This indicates that the market’s favorable response to elections is more about resolving uncertainty and restoring investor confidence than the specific policies of the winning party. Regardless of whether a Republican or Democrat assumes the presidency, the market usually rallies once the electoral uncertainty dissipates, which could potentially have positive implications for Bitcoin as well.
It’s important to mention that Bitcoin’s correlation with the S&P 500 often strengthens during periods of economic expansion and risk-on sentiment. When markets are thriving, Bitcoin typically shows a similar trend. However, in risk-off scenarios, where investors gravitate towards safer assets like bonds or gold, Bitcoin can face notable sell-offs. This behavior is something Aussie crypto enthusiasts should contemplate, especially when strategising their portfolios around significant global events like U.S. elections or economic downturns.
For Australian crypto investors, these trends warrant close attention. While U.S. elections might seem far off, their ripple effects on global markets, including Australia’s ASX, are unmistakable. A rally in the U.S. stock market often lifts global investor sentiment, including in Australia. Given Bitcoin’s connection to the S&P 500, it stands to reason that BTC may also gain from this post-election boost.
