March 27, 2018, 10:48 AM EDT
Bitcoin may not cut it as a currency in Mark Carney’s eyes, but it has at least one other use: it’s a pretty good measure of animal spirits.
There’s a remarkable similarity in chart movements of the digital token and the forward price to earnings ratio of stocks in the S&P 500 Index. The valuation measure peaked on the very same day as the cryptocurrency back in December, and hit a low days after Bitcoin bottomed out.
“The price of Bitcoin is worth watching,” Morgan Stanley analysts including Michael Wilson wrote in a report Monday. “While we do not expect this relationship to continue to hold so tightly we do think it will be hard for price-to-earnings to move significantly higher or lower without a commensurate move in the digital currency.”
Morgan Stanley notes that Bitcoin has been leading the way, making it a useful indicator. It bounced off its 200-day moving average (according to Bloomberg generic pricing) just a week before the S&P did on Monday. And the correlation between the earnings ratio and cryptocurrency has nudged higher after turning positive in the middle of last year.
— With assistance by Lucy Meakin