Exploring the relationship between cryptocurrency and S&P500: evidence from wavelet coherence analysis

Abstract

The increasing interest in digital currencies, their exceptional price rise, and the continuous discussions about their benefits raise the question: to what extent can it be an alternative to the traditional currencies in the future? It has become a prominent topic of discussion among several investments and market stakeholders seeking to enhance the growth of their wealth. This paper aims to bring answers to the nature of relationships between four major cryptocurrencies (Bitcoin, Ethereum, Litecoin, and Ripple), and the stock market return (S&P500). This study applies the wavelet method to daily data from 1 June 2017 to 15 November 2021, in COVID-19 sanitary crisis time. According to the results, this study shows a positive co-movement in the medium and long run between the four studied cryptocurrencies and S&P500 during different periods, especially in times of uncertainty. These findings have practical implications as they can be used strategically to make optimal investment decisions and build portfolio diversification strategies with the conventional financial market asset.