The world's most popular cryptocurrency has recorded a high degree of correlation with the Nasdaq 100 since 2020, and a recent drop in Bitcoin's levels has left investors wondering if the 100-stock gauge of the largest non-financial companies may be destined to show a similar trend.
Over a four-year period, the correlation coefficient or the degree to which price movements mirror each other has been over 0.8.
Values for the coefficient may range from -1 to 1, with the highest implying perfect imitation in terms of change, and a of -1 implying a perfectly opposite effect. A coefficient of 0.8 implying a high degree of correlation between the two.
As a signal, Indian investors have routinely kept their eye on the US equity movements to estimate what kind of a move might also be seen in the Indian markets the following day. This is because the western nation's markets are trading during hours when Indian markets might not be, and display a reaction led by global events or economic cues from around the world, and especially the US.
This is supported by a correlation coefficient of 0.78 between the NSE's Nifty 50 and the Nasdaq 100.
But does this mean that the Indian markets should also be looking for a corrective move soon? Since March, Bitcoin has fallen over 8%, while the benchmark Nifty is trading higher by 5.4%.
While a high degree of correlation does exist between Bitcoin and Nasdaq 100, as well as between Nasdaq and Nifty 50, only a weak one is observed between Nifty 50 and Bitcoin over the same period. Based on weekly closing prices since June 2020, the Nifty showed a correlation coefficient of 0.58, which is relatively weaker than that of Nifty 50 and Nasdaq 100, or the Nasdaq 100 and Bitcoin.
As the Nasdaq 100 index has a higher weightage of companies in the technology space, it is also important to look at India's benchmark for IT stocks, which is the Nifty IT index. Despite the difference in sectoral weightages, the Nifty IT shows a near equal similarity with the Nasdaq 100, as the Nifty did. The correlation coefficient between the two (Nifty IT and Nasdaq 100) stands at 0.77.
However, a relatively higher degree of correlation appears between the cryptocurrency and Nifty IT, with the figure at 0.68. While this is definitely higher than that with the Indian markets benchmark, it may still be qualified as only a "moderate" degree of correlation.
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