Professor Coin: When Bitcoin Sneezes—How Crypto and Equities Caught the Same Cold
Bitcoin was once sold as something entirely different from stocks: a digital asset that would dance to its own rhythm, indifferent to Wall Street, central banks, or macroeconomic headlines. For a while, the data supported that narrative.
Early academic studies—such as work by Liu and Tsyvinski in the late 2010s—showed that Bitcoin’s returns could not be explained by the usual equity risk factors. Traditional variables like size, value, momentum, or market beta did a poor job of accounting for its wild price moves. In other words, Bitcoin looked “orthogonal” to stocks: volatile, yes, but largely uncorrelated.
That made crypto extremely attractive from a portfolio theory perspective. If an asset has high expected returns and low correlation with equities, it can improve the risk–return tradeoff of a diversified portfolio. Crypto advocates eagerly seized on that point: owning Bitcoin, they argued, could both boost returns and reduce overall risk, thanks to its distinctive behavior.
But the last few years have put that story under severe pressure. A growing body of academic literature now documents that correlations and spillovers between crypto and equities are no longer negligible—and that they spike precisely when investors would most like them to be low: during episodes of economic and financial stress. Rather than being an antidote to turbulence in stock markets, crypto has increasingly moved in lockstep with other risky assets.
From diversifier to “just another risk-on asset”
Recent empirical research uses tools such as time-varying correlation models, spillover indices, and connectedness measures to track how crypto and equity markets interact over time. The results converge on a clear narrative:
– In calm periods, correlations between Bitcoin and major stock indices can be modest or even close to zero.
– During crises—pandemic shocks, inflation scares, monetary tightening, banking stress—those correlations rise sharply.
– Spillovers in volatility and returns flow in both directions, but particularly from equities and macro shocks into crypto prices.
This pattern undermines two popular claims: that Bitcoin is a safe haven similar to gold, and that it acts as a hedge against turmoil in equity markets. Instead, the data increasingly classify Bitcoin and large-cap crypto as high-beta, speculative assets that behave like an extension of the tech and growth complex.
What the newest evidence tells us
More recent work goes beyond simple correlation and asks a deeper question: where does the risk come from, and how is it transmitted? Several robust themes emerge:
1. Common macro drivers
Cryptocurrencies and equities—especially tech stocks—are both highly sensitive to global liquidity, interest rate expectations, and risk sentiment. When central banks are cutting rates and liquidity is abundant, both markets tend to rally. When inflation rises and policy tightens, both tend to sell off.
2. Asymmetric behavior in crises
Studies show that correlations are not constant: they are state-dependent. In good times, diversification benefits exist. In bad times—when equity markets plunge—crypto often falls as hard or harder, and linkages with equities intensify. That is precisely when investors most want an asset to behave differently.
3. Volatility spillovers
Using high-frequency data, researchers find that volatility shocks can spill from equities to crypto and vice versa. A major macro announcement or a big move in the Nasdaq can trigger increased volatility in Bitcoin within minutes. Similarly, a dramatic crypto crash can briefly ripple into risk sentiment for equities, especially in periods when crypto’s market capitalization is large relative to other asset classes.
4. Maturity of the market
As crypto markets have grown and institutional participation has expanded, cryptocurrencies have been increasingly integrated into the broader financial system. This integration has benefits—more liquidity, tighter spreads, more robust infrastructure—but it also means crypto is more exposed to the same forces moving other financial assets.
Why tech and crypto now move together
The strongest and most persistent correlation that has emerged is between crypto and high-growth technology stocks. Several structural reasons explain this convergence:
– Investor base overlap: The same risk-seeking investors and funds that pile into unprofitable tech names and growth stories are often active in crypto. Their risk appetite, leverage, and positioning decisions affect both markets simultaneously.
– Discount rate sensitivity: Both tech stocks and cryptocurrencies derive much of their value from expectations about the distant future—future cash flows in the case of tech, and future adoption or scarcity value in the case of crypto. When interest rates rise, those distant payoffs are discounted more heavily, hurting valuations in both markets.
– Innovation and narrative channels: Crypto and tech share similar narratives: disruption, digital transformation, decentralized infrastructure, artificial intelligence, and the future of the internet. Market enthusiasm (or disillusionment) around innovation tends to wash across both spaces.
– Derivatives and leverage: The availability of futures, options, and structured products in both crypto and tech allows investors to express views on “risk-on” sentiment quickly and with leverage. This amplifies co-movement when positioning is crowded.
Correlation is not destiny—but it is a warning
It is important to stress that higher correlations in stressed markets do not mean Bitcoin and stocks have become identical assets. Crypto still exhibits unique return patterns, idiosyncratic regulatory shocks, protocol-specific risks, and episodes of extreme, market-specific volatility. However, the notion that Bitcoin naturally insulates a portfolio from equity downturns is increasingly at odds with empirical evidence.
In particular:
– Crypto continues to offer diversification in some states of the world, especially in calm or moderately volatile conditions.
– During systemic shocks—pandemic collapses, aggressive rate hikes, broad risk-off events—this diversification largely disappears.
For long-term investors, the key question is not just “What is the average correlation?” but rather “What happens when things go wrong?” Academic work makes clear that crypto and equities tend to “catch the same cold” precisely when risk aversion surges.
Implications for portfolios and risk management
What does this shift mean for portfolio construction? Several implications stand out:
1. Don’t rely on crypto as a crisis hedge
Positioning Bitcoin or other large-cap cryptocurrencies as the primary hedge against equity crashes is increasingly hard to justify. The data suggest that during sharp equity selloffs, crypto is likely to be a source of additional losses, not protection.
2. Treat crypto as part of the risk-on bucket
Portfolio managers are now more likely to group crypto alongside growth equities, small caps, and high-yield credit in the “risk-on” segment of a portfolio. That does not negate its potential benefits, but it changes how exposure should be sized and hedged.
3. Risk budgeting and leverage
Given crypto’s extreme volatility, even a modest allocation can dominate a portfolio’s risk profile. When correlations with equities spike, total portfolio drawdowns can become much larger than backtests based on earlier, low-correlation regimes might suggest. Risk limits and leverage assumptions should be updated to reflect more recent behavior.
4. Dynamic allocation and regime awareness
Several studies highlight the value of regime-switching approaches—strategies that adjust crypto exposure based on macro conditions, volatility regimes, or market stress indicators. Instead of a fixed allocation, some investors may opt for a dynamic one that increases crypto exposure in calm, liquid periods and reduces it when systemic risk rises.
5. Revisiting diversification sources
If crypto no longer reliably diversifies equity risk in crises, investors may need to look elsewhere for shock absorbers: high-quality government bonds, certain commodities, or market-neutral strategies. Crypto can still play a role as a speculative growth asset or as a long-term bet on digital infrastructure, but that is different from being a portfolio stabilizer.
Cross-asset contagion: when Bitcoin’s cough becomes a market flu
Another important strand of academic work examines contagion—how shocks in one market transmit to others in a way that cannot be explained solely by fundamentals. During major crypto events—exchange collapses, stablecoin depegs, or large-scale liquidations—researchers have documented:
– Short-lived but measurable impacts on equity volatility indices.
– Widening spreads in risk assets that share similar investor bases.
– In some cases, increased stress in funding markets used by leveraged investors active across both crypto and equities.
While crypto remains small relative to global equity or bond markets, these episodes suggest that as the sector grows, its ability to propagate shocks into the broader financial system will rise. Regulators and risk managers are paying increasing attention to these channels—particularly where stablecoins, tokenized assets, and traditional financial institutions intersect with crypto markets.
Why the early “uncorrelated” story made sense at the time
It would be a mistake to dismiss the older academic view of Bitcoin as simply “wrong.” In its early years, Bitcoin existed largely outside institutional portfolios. Trading was fragmented, liquidity thin, and participation dominated by retail investors and early adopters with idiosyncratic motives.
In that environment:
– Macro sensitivity was weaker, because professional macro funds were hardly involved.
– There were fewer derivative products linking crypto to broader risk factors.
– Pricing was driven more by internal events—protocol upgrades, hacks, exchange failures—than by global financial conditions.
As crypto integrated more deeply with traditional finance—with futures, ETFs, centralized exchanges courting institutions, and increased overlap with tech investors—the drivers of returns inevitably converged with those in equity markets. The story changed not because the early data were misread, but because the underlying market structure evolved.
What might change the relationship again?
The correlation between crypto and equities is not a law of nature; it is a product of market structure, regulation, and investor behavior. Several developments could, in theory, weaken this link over time:
– Wider use of crypto as a transactional or settlement medium rather than a pure speculative instrument, potentially creating demand patterns less tied to global risk sentiment.
– Distinct regulatory frameworks that make crypto ownership and usage meaningfully different from holding equities, introducing unique drivers of returns.
– Growth of real-world asset tokenization and on-chain financial infrastructure, which could shift crypto’s role from “bet on price” to “plumbing of the financial system,” altering its risk profile.
– New investor cohorts whose primary interest in crypto is utility, payments, or access to decentralized services, rather than leveraged speculation.
For now, however, the dominant reality in the data is clear: crypto trades like a high-volatility extension of the tech and growth universe.
Practical takeaways for individual investors
For individual investors managing their own portfolios, the academic findings translate into some simple, practical guidelines:
– Expect crypto to fall when stocks fall—especially in big macro shocks.
– Size positions carefully: even a small crypto allocation can create large swings in portfolio value.
– Avoid assuming that “Bitcoin will save me in a crash”; design hedges and emergency plans based on assets with a proven history of resilience in crises.
– Reassess old backtests that show large benefits from adding Bitcoin between, say, 2013 and 2018; more recent years reflect a different correlation regime.
– Separate beliefs: one can still believe in the long-term potential of crypto technology while acknowledging that, in the short to medium term, it behaves like a speculative risk asset.
A new chapter in crypto’s financial identity
Bitcoin began its life as an outsider to traditional finance, seemingly insulated from the booms and busts of global markets. Academic research initially confirmed that impression, describing a market that moved to its own drumbeat.
The latest wave of evidence tells a more sobering story. As cryptocurrencies have become mainstream, their fates have increasingly intertwined with equities—especially high-growth tech names. When global risk appetite turns, both tend to move together. When stress hits, correlations and spillovers jump.
For portfolio managers, risk officers, and individual investors alike, the lesson is straightforward: crypto can still offer unique opportunities and play a valuable role in a diversified portfolio, but it is no longer credible to treat it as a natural hedge or a safe haven from equity market storms. Today, when Bitcoin sneezes, it is often because the rest of the risk asset world has already caught the same cold.