Cryptocurrencies have evolved from digital novelties into significant financial assets, capturing the attention of individual investors, institutional players, and academic researchers alike. As blockchain-based assets like Bitcoin, Ethereum, Cardano, and Chainlink continue to break all-time high records, understanding their relationship with traditional investment instruments—such as the S&P 500 and US 10-year Treasury bonds—has become essential for modern portfolio construction.
This article presents a data-driven analysis of the correlation and causal relationships between major cryptocurrencies and key financial indicators using the Granger causality test. The findings offer valuable insights for investors aiming to diversify portfolios in a hybrid financial landscape where digital and traditional assets coexist.
Understanding the Research Framework
The study focuses on assessing how movements in Bitcoin are influenced by or influence other digital and traditional assets. The selected variables include:
- Bitcoin (BTC) – The dependent variable
- Ethereum (ETH), Cardano (ADA), Chainlink (LINK) – Major altcoins
- S&P 500 Index – A benchmark for US equities
- US 10-Year Treasury Yield – A proxy for risk-free returns
- FED Interest Rates – A monetary policy indicator
The primary hypothesis tested is whether Bitcoin prices are affected by these external factors. The research utilizes weekly data from January 2020 to January 2021, a period marked by global economic uncertainty due to the pandemic and increased institutional adoption of digital assets.
👉 Discover how market volatility can create strategic investment opportunities in crypto
Performance Comparison: Returns and Risk Profiles
A critical component of investment decision-making is evaluating return potential against risk exposure. The following table summarizes the average returns and risk metrics (standard deviation and variance) of the analyzed assets over the one-year period.
| Asset | Average Return | Risk (Std Dev) | Risk Rank |
|---|---|---|---|
| Chainlink (LINK) | 6.22% | 19.31% | 1 |
| Cardano (ADA) | 5.74% | 18.59% | 2 |
| Ethereum (ETH) | 5.20% | 15.31% | 3 |
| Bitcoin (BTC) | 3.61% | 10.84% | 5 |
| S&P 500 | 0.36% | 4.45% | 6 |
| US 10-Year Treasury | -0.02% | 13.09% | 4 |
| FED Interest Rate | 0.47% | 0.51% | 7 |
Chainlink emerged as the top-performing asset with a 6.22% return, though it also carried the highest risk. Cardano and Ethereum followed closely, outperforming Bitcoin in both return and volatility. Notably, the US 10-year Treasury posted a slight negative return (-0.02%), making it not only the lowest-yielding but also riskier than Bitcoin when adjusted for volatility.
Correlation and Causal Relationships
Using Granger causality testing, the study examined whether past values of one variable could predict future values of another. The results revealed several key insights:
- Bitcoin and Ethereum: A statistically significant positive relationship was found. A one-unit increase in Ethereum’s value correlates with a 0.85-unit rise in Bitcoin’s value, indicating strong interdependence between the two largest cryptocurrencies by market cap.
- Bitcoin and Altcoins (Cardano, Chainlink): No significant causal link was detected, despite their high returns. This suggests that while these altcoins may perform well independently, they do not directly drive Bitcoin’s price movements.
- Bitcoin and Traditional Markets: Bitcoin showed no meaningful correlation with the S&P 500, reinforcing its status as a non-correlated asset class—valuable for portfolio diversification. However, it exhibited a decreasing linear relationship with FED interest rates and the US 10-year Treasury, implying that tighter monetary policy may negatively impact crypto valuations.
- Traditional Instruments Among Themselves: The S&P 500 and Treasury yields were uncorrelated, while FED rates showed a weak inverse relationship with both.
FAQ: Frequently Asked Questions
Q: Does Bitcoin move with the stock market?
A: No significant correlation was found between Bitcoin and the S&P 500 during the study period, suggesting Bitcoin can act as a hedge against equity market fluctuations.
Q: Which cryptocurrency offered the highest return?
A: Chainlink (LINK) delivered the highest average return at 6.22%, followed by Cardano (ADA) at 5.74%.
Q: Is the US 10-year Treasury a safer investment than Bitcoin?
A: Surprisingly, no. Despite its reputation as a safe-haven asset, the Treasury underperformed Bitcoin in both return and relative risk during this period.
Q: How does monetary policy affect cryptocurrencies?
A: The study found a decreasing linear relationship between FED interest rates and Bitcoin, indicating that rising rates may pressure crypto prices.
Q: Can altcoins predict Bitcoin’s movement?
A: Only Ethereum showed a predictive relationship with Bitcoin. Cardano and Chainlink did not Granger-cause Bitcoin price changes.
Q: Why include a vaccine rollout dummy variable?
A: A dummy variable was added to account for the impact of coronavirus vaccine announcements in early 2021. Results showed a positive effect on Bitcoin prices during vaccine rollout periods.
Implications for Portfolio Diversification
The findings support integrating cryptocurrencies into modern investment portfolios. Their low correlation with traditional indices like the S&P 500 enhances diversification benefits. High-performing altcoins such as Chainlink and Cardano offer substantial return potential, albeit with higher volatility.
Investors should consider:
- Allocating a portion of capital to Ethereum due to its strong link with Bitcoin.
- Monitoring macroeconomic indicators like FED rates, which may indirectly influence crypto markets.
- Treating altcoins as independent growth assets rather than derivatives of Bitcoin’s performance.
👉 Learn how to build a balanced crypto portfolio using real-time market analytics
Limitations and Future Research
While this study provides robust short-term insights, it has limitations:
- The analysis covers only one year (2020–2021), a period heavily influenced by pandemic-related fiscal policies.
- Only three altcoins were included; future studies could expand to include assets like Solana, Polkadot, or Avalanche.
- Variables such as gold, oil prices, exchange rates, and global equity indices were not incorporated but could enrich cross-market analysis.
Repeating this analysis over different market cycles—including bull and bear phases—would yield more comprehensive insights into long-term correlations.
Conclusion
Cryptocurrencies are no longer speculative outliers but integral components of the global financial ecosystem. This Granger causality analysis demonstrates that digital assets like Bitcoin and Ethereum exhibit unique behavioral patterns distinct from traditional markets. While Chainlink and Cardano offer superior returns, their lack of causal influence on Bitcoin highlights the fragmented nature of the crypto market.
For investors, the takeaway is clear: cryptocurrencies provide both high-growth opportunities and effective diversification tools. As central banks explore digital currencies and institutional adoption grows, understanding these dynamics will be crucial for navigating the future of finance.
👉 Stay ahead of market trends with advanced trading tools designed for informed investors