In 2020, the price of the leading asset had one of its worst one-day drops ever, and the correlation with the equities market reached a new high.
Currently, bitcoin is keeping above $8,000 and the next move in BTC according to economist and trader Alex Kruger “would depend on what stock indices do. Bitcoin continues to trade like a risk-on asset. Rolling correlations between BTC and the S&P 500 remain around historical highs.”
Similar sentiments have been shared by Binance in its latest report where it points out that BTC had a “moderate positive correlation” with US equity indexes at 0.57. This correlation has been despite the price of the digital asset ending the quarter first down by -10% while the S&P 500 suffered greater losses of over -19%.
This correlation, however, is very unlikely to persist in the medium or long term.
While many in the crypto space have been pointing out that Bitcoin is acting like a risk-on asset just like the stock market, given their correlation jumped to an all-time high, it’s important to note that the correlation for bitcoin with gold and that of gold with the equity market also jumped during this market turmoil triggered by the coronavirus pandemic.
As such, trader Scott Melker says Bitcoin and stocks are not correlated assets just because they had similar price movements at times over the past weeks.
Markowitz was the one with the idea of ranking correlated assets and by using a math formula, you can compare two assets on a scale to -1 to 1, explained Melker on Twitter.
Here, 1 means two assets are correlated and if one moves 5% so will the other asset. On this scale -1 means inversely correlated and 0 is not correlated at all.
Now, in bitcoin’s 11-year history, its correlation with SPX has been .15, which is not correlated. However, in March, the correlation spiked to .57, which is moderately correlated for a brief amount of time.
However, “the problem with Modern Portfolio Theory is that everything moves nearly to a 1 in a global crisis – including other “safe haven” assets like gold and silver. And Bitcoin STILL only reached a .57 – moderate correlation. This is math & defines correlation,” said Melker.
Also, while BTC bottomed on March 12th, SPX didn’t bottom until 23rd. And during this 10 days gap, while bitcoin was climbing higher, having surged 84% S&P 500 continued to fall.
Now, “to believe they are correlated directly would mean that Bitcoin was leading the market,” but it isn’t the case.
Since bottoming out, bitcoin and SPX both have leveled out. Although they had “somewhat similar price movement” Bitcoin still led on low time frames.
Now, looking at the four assets in the legacy markets, that is, stocks, bonds, commodities, and currencies, they all are correlated to various degrees. But the difference between them and bitcoin is these assets are all valued based on similar factors such as GDP, interest rates, and corporate earnings.
But Mark Yusko, founder and CEO of Morgan Creek Capital Management pointed out Bitcoin finds its value from network value, government regulation, millennial adoption, and other completely separate factors.
As a result, by definition Bitcoin is uncorrelated to equity markets. And instead of being a hedge against global crisis, it is a hedge against hyperinflation and bad actors, said Melker.
“This is the very reason that all investors should hold some Bitcoin – it offers idiosyncratic risk rather than systematic risk like other assets. Even if it is a RISKIER asset, having it in a portfolio reduces overall portfolio risk due to this lack of correlation.”