The financial world is asking: Has Bitcoin become a leading indicator for the entire market?

Because of a rare deep decline in two years (down more than 10% from the 52-week high), the U.S. stock market ended its previous 10-month winning streak in February. While people are still discussing who is the culprit (VIX derivatives or rising inflation?), Gundlach, the founder of DoubleLine Capital, who is hailed as the "new bond king" by Wall Street, pointed out an interesting phenomenon.

Wall Street Journal once mentioned that Gundlach made a golden statement in an interview with financial media CNBC last Friday: "If you want to know the direction of the stock market, observe Bitcoin", because the trend of Bitcoin is basically a typical representative of public and market sentiment.

He found that the price of Bitcoin has been rising in a straight line since September 7 last year, soaring from $4,500 to nearly $20,000, and the trend of the three major U.S. stock indexes during the same period was the same. But Bitcoin peaked in mid-December last year and began to fall, which seemed to predict the next move of the U.S. stock market: falling to a technical consolidation range within a week starting from January 29.

Gundlach even said: “If the stock market falls again, I think it will be led by a new round of declines in Bitcoin. I personally actually use sentiment indicators for speculative assets such as Bitcoin as a guide to future stock market possibilities.”

Financial blog Zerohedge therefore asked whether Bitcoin has become a leading indicator of the entire market as this financial tycoon said, rather than being a non-traditional safe-haven asset that was previously "touted" as having a weak correlation with other assets?

In fact, Gundlach's view is not isolated. As early as January 22, before the U.S. stock market peaked, Deutsche Bank discovered that since the end of 2017, the price changes of Bitcoin have shown a stronger negative correlation with the U.S. stock market "fear index" VIX, that is, when VIX rises, Bitcoin falls.

This pattern is more "distinct" in the research report of consulting firm DataTrek this week. Analyst Nicholas Colas' team believes that the concept of Bitcoin as the riskiest asset in the capital structure has gradually gained global market consensus. As digital currencies are becoming part of mainstream financial assets, their fate is also more closely linked to "risk tolerance."

His statistical model covered the rolling average of the two major indicators over the past 10 days and found that when U.S. stocks fell sharply this month, there was "clearly a highly correlated link" between the price of Bitcoin and the S&P 500 market.

When the U.S. stock market was still in a downward channel on February 6, this correlation reached 0.79 in the range of -1.0 to +1.0. However, the positive correlation between prices (points) then weakened rapidly, and turned negative after the U.S. stock market rebounded on February 21.

If the statistical period is expanded to the rolling average of the past 90 days, this correlation still exists and is higher than in the past two years (the statistical starting point is January 2016). The study found that the turning point of the correlation increase was August 2017, when Bitcoin and US stocks went from being completely unrelated to a positive correlation of 0.10, and currently remain between 0.25-0.30.

Zerohedge analysis believes that although this correlation is not statistically at an absolute high level, it is enough to attract the attention of market participants. The conclusion drawn from this is that Bitcoin seems to be more of a leading indicator of the market's downward trend when its price falls. This analysis is also logical. When the market's risk tolerance suddenly changes, capital will flock out of other risky asset categories.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, also asked in a February research report, "Is Bitcoin the next market leader?" The accompanying question is: Will Bitcoin's high volatility also become the "fate mentor" of the future market?