According to its proponents, crypto is an uncorrelated asset class and as such should contribute to portfolio diversification. However, research has shown that this claim has not held up particularly well.
We examined the connection between where Bitcoin mining took place and the correlation of local stock market performance with Bitcoin prices and located that, particularly within the United States, the performance of the S&P 500 and Bitcoin prices in have had a positive correlation over the past five years.
Because most Bitcoin mining over the past five years has occurred within the United States and China, we used the S&P 500, Hang Seng, and Shanghai Composite indices as our regional proxies. We calculated the nine-month rolling correlation between Bitcoin returns and every of the three indices using weekly data. We then compared this to the Bitcoin hash rate by country from September 2019 – which is way back to reliable records show – to January 2022. The Bitcoin hash rate measures the computing power of the Bitcoin blockchain and is an indicator of the dimensions of the Bitcoin mining is completed.
Before November 2020, China accounted for greater than 60% of Bitcoin mining. But by November 2021, China’s share had fallen to about 15% in response to government moves to scale back Bitcoin mining. During the identical period, the US share of world Bitcoin mining rose from around 10% to over 35%.
Bitcoin hash rate distribution by country, September 2019 to January 2022
Distribution of Bitcoin mining by country, 2019 to 2022
These trends make the November 2020 to November 2021 period a wonderful window into how Bitcoin price index correlations adjust as Bitcoin mining ebbs and flows. We found that Bitcoin’s correlation with the S&P 500 increased from 0.28 to 0.39 when US crypto mining peaked between November 2020 and November 2021. But as crypto mining collapsed in China throughout the same period, Bitcoin’s correlation with the 2 Chinese indices also fell. The Bitcoin correlation of the Hang Seng and the Shanghai Composite fell from 0.21 to -0.14 and from 0.09 to -0.44, respectively.
Bitcoin correlations with stock indices
| November 2020 | November 2021 | |
| S&P 500 | 0.283 | 0.386 |
| Hang Seng | 0.213 | -0.138 |
| Shanghai composite | 0.085 | -0.437 |
The results suggest that the more Bitcoin is mined in a given country, the greater the correlation between the cryptocurrency and native stock markets. When Bitcoin mining declines in a region, the correlation between Bitcoin and native stock markets also declines.
Our hypothesis also applies to the annual correlations between Bitcoin prices and the relevant indices. The more Bitcoins are mined in a single location, the greater the correlation between the Bitcoin price and the local stock markets. This relationship was strongest for the S&P 500 and Shanghai Composite and weaker for the Hang Seng over the complete period.
Annual Correlations: Bitcoin and Stock Indices
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
| S&P 500 | -0.174 | -0.119 | -0.045 | 0.064 | 0.155 | 0.186 | 0.747 |
| Hang Seng | -0.289 | -0.378 | 0.010 | 0.011 | 0.148 | -0.190 | 0.400 |
| Shanghai composite | 0.014 | 0.253 | 0.096 | 0.122 | 0.169 | -0.390 | -0.040 |
Overall, our results suggest that where Bitcoin is mined can influence the way it moves and which stock indices it moves with. And this impacts what diversification advantages Bitcoin may or may not bring to a portfolio.
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Photo credit: ©Getty Images/photonaj
